Purchasing a secure stream of income, an annuity, in recent years has often been dismissed by many people in favour of income drawdown. Income drawdown is a retirement option where you keep control of the pension fund and usually take an income of your choice from your pension fund that remains invested. With an annuity, you give up control of part or all of the pension fund in return for an income, usually for your lifetime.
The current state of investment markets is well documented. Most people in income drawdown with invested assets will have seen significant falls in the value of their funds over the last 12 months. A contributing factor to the fall in portfolio values has been a noticeable decline in the value (capital value) of Fixed Interest (GILTS and corporate bonds).
A large part of pricing annuity rates, which are effectively long-term liabilities for insurance companies, is around the return (or ‘yield’) that can be obtained from Fixed Interest securities. With the capital value of Fixed Interest securities falling, the ‘yield’ increases. This is best demonstrated by sample annuity rates supplied by Canada Life, a long-standing competitive annuity provider. Twelve months ago, a pension fund of £100,000 buying a lifetime annuity for a 72yr old individual, with a ten-year guaranteed period, on a single life basis, payable monthly, and level in payment would have delivered an income of £5,400 per year (before tax). The same annuity basis now would deliver an income of £7,400 per year (gross) . This is a 37% increase, for life.
Whilst the merits of an income drawdown plan remain compelling; keeping control of the pension fund, variable income, the ability to tax plan and a potential legacy outside of your estate, exploring annuity options now may be worthwhile. It is not necessary to use all of your pension fund to buy an annuity. Frequently pension plans are sufficiently flexible to allow a portion or percentage to be hived off and used.
When setting up an annuity, you can cater for early death with guarantee periods, protection of the initial purchase price and ongoing income for loved ones. Escalations can be introduced to provide a hedge against the cost of living. These options will all have an impact on the starting level of income.
An annuity can help towards delivering the essential spend (e.g., food, utility bills, clothing, council tax) that we will all need in retirement. This can be complimented by an income drawdown approach for lifestyle and luxury spend where sufficient pensions funds are available.
If you would like to discuss annuity options in greater detail, contact our multi award winning financial planning team.