Is now the right time to buy an annuity?

by Oscar James on April 16, 2012

This is a difficult question that thousands of people approaching retirement maybe asking themselves. With shrinking pension pots and record low annuity rates, those retiring now may have to adjust their own perception of what life will be like in retirement, often lowering their own expectations. Although many will be asking this question, it is very difficult to answer comprehensively one way ro another, because no one knows what will happen to the economy in the future, and whether rates will rise or fall. The reason why people are hesitant about annuities is that rates have fallen dramatically over recent years. For example back in 1990, a £100,000 pension fund would have yielded an annual income of around £15,000. Today that same pension fund would be worth less than £6,000 a year,a huge drop with which to contend. Although delaying an annuity purchase can seem logical given the low rates, each month you delay is a month you are not receiving an income from your pension fund. Do this for 12 months and you have lost a year’s worth of income which can take a much longer time period to recoupe.

The slide in annuity rates has been caused by record low gilt yields (the return on government bonds) as well as an increase life expectancy rates. With such a poor return on offer, many are considering delaying their annuity purchase hoping rates will improve or alternatively they are looking at other options such as phased drawdown or temporary annuities.

Despite this however, annuities remain the most popular retirement income product as they offer a secure and dependable income in retirement. Although rates have tumbled, the security of knowing you will receive an income for the entirety of your retirement is what makes them remain the most popular option when at retirement. Alternatives such as drawdown, whereby you draw your pension gradually each year on the back on investments can be risky as your income level is tied to the performance of these investments. Many people who bought drawdown plans in the past 4/5 years are now seeing their income level reduced because of compulsory fund reviews. Also income drawdown is only really suited to those who have a large pension find to invest, so for most people this is not a viable option.

One choice which can overcome the issue of committing all of your pension fund in one go is to buy a fixed term annuity. These are temporary annuities which pay out for a specific time period usually 5 or 10 years. This allows an individual to retain some of their pension fund so as to not commit the entire amount at once they retire. Should annuity rates improve in the future and/or their own personal circumstances change, then they will have retained some of their pension pot with which they can invest in other product (s).


Related posts:

  1. Annuity Rates fall in January 2012
  2. Delaying the purchase of an annuity could cost you thousands
  3. Gilt yield increases see slight rise in Annuity Rates

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