What is an annuity and do I need one? That’s something clients often ask us.
So, let’s start with what it is…
In summary, an annuity is an income plan in exchange for a lump sum of money. Typically, annuities are associated with pensions, and used to be the only way you could access your pension pot once you reached a certain age.
In 2015 the Chancellor announced new pension regulations, enabling people to access their pension fund as they wished, rather than being forced to buy an annuity. This made annuities less popular.
When these changes were first announced, some new pensioners made the mistake of withdrawing all of their pension and then did not budget for the future. This left a large hole when they realised they couldn’t just spend the money.
If you think having the money available to you would be far too tempting, then an annuity could be a way to mitigate this for you. You would receive a regular sum of money, in much the same way as you would a standard pension.
Annuities work well for those with a long life expectancy. Of course, none of us have a crystal ball so we don’t know how long we will live, but you can look at your family history, your own health and fitness, and lifestyle and make a judgement.
It is important to accept that most annuities die with you – you cannot leave it in a trust.
However, if you have a guaranteed or joint life annuity then it continues to support your partner. This works differently dependent on the plan but can often pay 50-60% of the original scheme to your spouse for the rest of their life. There are sometimes conditions attached to this, so please do read the small print.
It is also possible to purchase an enhanced annuity if you have a shorter life expectancy. Typically you would receive an improved income on the assumption the plan would not last as long. You can also pay a premium to protect the death benefit, so you still provide for loved ones.
If you are a risk averse investor an annuity could work well for you. The income it provides is guaranteed for your lifetime. However, it can provide a reduced return to that achieved through a pension investment. Typically most pensions are invested on the stock market or commodities and whilst these are subject to volatility, you can achieve greater returns. As always it is about the balance of probabilities and your attitude to financial risk.
If you decide to go for an annuity, it is important to shop around to get the best rate possible.
If you would like to talk about annuities in more detail, please contact us on 01344 875 310.