More bad news for retirees emerged this week with the announcement that annuity rates have fallen back further in the first quarter of 2012. Data from the MGM Advantage Annuity Index shows that conventional annuity rates have fallen by 0.48% with enhanced rates falling by 2.48%. Since the index started back in 2009 rates have dropped by a massive 11.2%. For those approaching retirement they really are stuck between a rock and a hard place when it comes to pensions. Not only have many retirees seen their pension funds shrink in the past 12 months due to the poor performance of the stock market, but they are also faced with the issue of lower annuity rates. And all this comes at a time when inflation is high, squeezing living standards for almost everyone across the country.
Whilst there is nothing an individual can do about lower annuity rates, what is does do in bring into focus the different options available in retirement. When rates were 15% and above as they were twenty years ago, a level annuity seemed an attractive option for those who had been paying into a defined contributions pension scheme. However with £100,000 pension pot now only worth less than £6,000 a year in income for a 65 year old, standard annuities are much less appealing to retirees. So the question is what are the other options aside from committing all of your pension fund in one go, given that once you buy an annuity it cannot be altered in the future.
Annuity Deferral
One option is to defer buying an annuity in the hope that annuity rates improve and/or your circumstances may change whereby you maybe eligible for a higher paying enhanced annuity in the future. If there was an indication that rates were going to improve markedly in the next few years then this could seem like a credible thing to do. However, although no one can predict how rates will fair in the future, there are no indicators at the moment that rates will rise significantly in the short or medium term. The Chancellor has pledged to keep interest rates low to assist borrowers, small business owners and mortgage payers which means a jump in rates looks unlikely. Although by deferring an annuity purchase you may in the future be offered a higher rate as you are older, it may take several years before you recoupe the income you missed by delaying the purchase. If however you defer and you are offered an enhanced annuity, then it could make sense to delay, although predicting your future state of health and/or what rate you will be offered in those circumstances is also very difficult if not impossible.
Flexible Annuities / Drawdown
There are many annuity products on the market aside from standard annuities, although you can only discover these by shopping around between providers. Investment linked annuities including unit linked and with-profits annuities offer the chance of a potentially higher annuity income as your annuity is invested as opposed to being based on gilt yields. If you have a larger than average pension pot you might want to think about capped or flexible drawdown which allows you to withdraw funds from your invested pension pot (subject to annual limits).
If however you want the security of a fixed income but do not want to commit all your fund you may want to consider a fixed term or temporary annuity. These last for a set period such as 5 or 10 years and allow you to receive an income from your fund whilst holding some money back for any potential changes to rates and/or your own personal circumstances in the future.
You may even want to combine some of the above options in order to maintain a secure income but also have the chance of a higher income through investing part of your fund.
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