Why annuities are making a comeback
Like wide legged trousers and flip phones, annuities are back in fashion. They were cast aside in the early 2000s, with many retirees turning to pension drawdown instead. Interest rates were so low that committing to an annuity made little sense for many.
But with interest rates on the rise, pension annuity rates are now looking increasingly appealing. In fact, in March they reached a 14-year high.
An annuity is one way to guarantee an income for the rest of your life, whether you have a 10-year retirement or live to 110. However, that’s not to say they’re right for everyone.
Are annuities at their peak?
Purchase an annuity now and you’re likely to secure a much higher income than you would a year ago. According to Aviva, a 65-year-old could secure a rate nearly 50% higher today than this time last year. An 80-year-old could potentially get a rate that’s 33% higher than last year.
However, we can’t say with certainty how long this will last. If interest rates and inflation are now at their peak, the same may be true for annuities.
If you’re approaching retirement or you’re already in it, you might be wondering whether to act now. After the last few years, who can blame you? Had you fixed your energy bills and mortgage in 2021, you’d have saved a pretty penny, so it can be tempting to apply the same thinking here. And since annuities can be bought quickly and easily online, they might seem like the most financially sensible option.
But as attractive as an annuity might look right now, they won’t be right for everyone. And they certainly aren’t something to purchase on your coffee break.
Balancing finances with emotions
When deciding whether to purchase an annuity or not, you need to balance the practical and financial benefits with the emotional and psychological ones.
If you invest your pension well, your retirement fund could earn you a higher income than an annuity would. But making a reliable income from your portfolio can be challenging without financial advice. Without a carefully crafted financial plan in place, your income could fluctuate from one year to the next, making it hard to plan ahead for future goals.
But playing it safe isn’t always the solution either. If you’re risk-averse, you may lose money to missed opportunities and inflation. You can feel as though you’re playing it safe, but there’s still a risk of running out of money in retirement. Even if you don’t invest a penny.
If you desire security in retirement and you worry that you’ll run out of money, purchasing an annuity could give you peace of mind. And if that annuity helps you avoid sleepless nights and lowers your blood pressure, a smaller income could be a worthy compromise.
Even so, there’s more to consider. A guaranteed income can give you comfort, but not if it means settling for a lifestyle you’re unsatisfied with.
This is why financial advice is so important when deciding what to do with your pension. A good adviser won’t just look at your pension pot in isolation, they’ll explore every aspect of your financial situation from your property to your estate plans.
Not only if, but when
Not only have you got to decide if you’ll buy an annuity, you also need to decide when. As a general rule, the later you buy one, the better your rate tends to be. But of course, you don’t want to leave it too late either.
If you’re in poor health or you’ve already been retired for quite some time, an enhanced annuity may seem appealing. But we’ve worked with clients who are thinking of buying an enhanced annuity (or they already have one) only to later discover it’s a bad fit. Even if you’re offered an amazing rate, there may still be better options out there.
Annuities don’t have all the answers
Annuities aren’t perfect, even with rates as high as they are today. Level annuities don’t keep up with inflation, they’re famously inflexible, and when you pass away, there’ll be nothing left in the ‘kitty’. You can’t leave it to your beneficiaries like you might with a pension, investment account or savings. The money is no longer yours.
When interest rates were low, people paid close attention to such drawbacks. It’s harder to convince them of annuities’ shortcomings now that rates are high. People can become blinded by the headline figures.
As with any type of financial product, from mortgages to estate plans, there’s no such thing as a one-size-fits-all. Even when rates are as high as they are now, the decision of whether to buy an annuity is a personal one. An annuity could see you set for life, but without financial advice, it could become an expensive mistake.
Give us a call if you’d like to chat.