Personal finance F
or years, far too many people have been unaware of the choices open to them at retirement and have simply purchased the annuity (a type of insurance
contract that pays a guaranteed income for life) offered to them by their pension company. Following the recent Budget, the danger now is that too few people will buy an annuity of any description, even though, for many, it remains a sensible option.
The failure of many people to shop around for the best deal at retirement is certainly an issue. In 2013 one in every two people who bought an annuity purchased it directly from their existing pension provider, despite the fact that default annuity payments can be 20% lower than the best available rates.
Yet, there are more fundamental reasons why annuity
payments have fallen so much over recent years. Firstly, people are living much longer and secondly, the general level of interest rates in the economy is at a record low.
In 1960 a man in Britain reaching the retirement age of
by Ian Thomas CFPCM Director, Pilot FINANCIAL PLANNING.
ARE ANNUITIES A BAD DEAL?
65 could expect to live for a further 12 years. Now that figure is 19 years (and 21 years for women); many will live considerably longer. Looking forward, life expectancy will continue to increase and, from the annuity provider’s perspective, any lifetime income guarantees must incorporate this ‘longevity risk’.
Annuity rates are also based on the rate of interest
insurance companies can obtain from safe investments such as government bonds. In the current economic environment it’s therefore no surprise that annuity income payments remain low (and are likely to remain low for some time to come) but this doesn’t necessarily make them poor value.
Consider the alternative of income drawdown. Under
new rules announced in the Budget, from April 2015, your pension fund can remain invested and money can be withdrawn at any rate you choose.
this flexibility is certainly welcome; most people’s income requirements won’t remain constant throughout
leading the way in financial planning & wealth management
For more information contact Ian Thomas 01803 839 194
ian@pilotfinancialplanning.co.uk
Pilot Financial Planning is authorised & regulated by the Financial Conduct Authority.
www.pilotfinancialplanning.co.uk
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