26th April 2016 at 12:36pm
This month, Ken McGaughey, Head of Retirement Savings and Income Products, shares his thoughts on the role annuities could play in financial security, living longer and game-changing pension freedoms.
What most people want when they finish working isn’t really that different. Travel, spending more time with the family and hobbies top most people’s lists.
Of course, some of us don’t want to give up work in one go, preferring to work part-time or set up in business.
Me? I hope to kick off retirement with a tour of the USA. I’ve got to save the cash and get the kids through school first though.
We all need money to do the things we dream of, and navigating the line between having a good time and making sure we’ve got enough money to last the rest of our lives has become a bit more complicated since pensions changed in 2015.
The great pensions shake-up
Until then, most of us had little choice but to swap our hard-earned savings for an annuity to give us a regular income for life. It’s a route five million people alive today have taken.
But times have changed and everyone over the age of 55 with pension savings has more choice thanks to the new pension freedoms which arrived with such a bang last year.
Since then, some have chosen to take money out of their pension savings when they want to, either as lump sums or on a regular basis to give them an income, a bit like taking money out of a bank account. Others have left their savings untouched.
Wait a minute; aren’t annuities on the way out?
And that’s led some to argue that annuities are on the way to becoming about as extinct as the proverbial dodo.
The argument goes they’re inflexible; and you’re pretty much stuck with them, even if your circumstances change. Death benefits vary depending on which type you buy and they don’t necessarily compare favourably on this point with newer, more flexible pensions.
Plus, they just don’t give the same value they used to a few years ago because of the way annuity rates are worked out. This is in part because we’re all living longer (which has to be good news).
These reasons are likely to be at the heart of why their popularity has waned.
Shift in life expectancy matters… a lot
While none of us has the psychic ability to know how long we’ll live, 20 to 30 years after we finish working is now a decent batting average. Astonishingly, around one in ten men and one in five women* will soon live long enough to receive their centenary telegram from HRH The Queen, who is, of course, doing rather well at 90.
This is really important – just how can you make your retirement savings last when you don’t know how long you’re going to live? Spend too much and you might not have enough left to last your lifetime. And what about care costs down the line?
This is why I believe annuities will not become extinct, they’re just waiting for the right time to be very useful. (And I’d like to stress I’m not taking this view because annuities are a part of my job, although some might say that this sounds a bit like a turkey voting against Christmas).
Time to think differently?
Annuities give you a secure income which you can count on, year in, year out, until – inevitably, as everyone does – you die.
We can take advantage of being able to take money from our pension savings when we want and then switch to something that gives more security when we’re likely to need it most.
Take your tax free cash – 25% of your pension savings – any time from the age of 55, take money from your pension fund as and when you need or want to, or a regular income and keep the rest invested. And when the time is right for your circumstances, consider buying an annuity to last you the rest of your life.
That way, and with the state pension kicking in to support your finances from your late 60s, you could be on a solid financial footing for as long as you need.
And, who knows, you might even be getting that telegram from the Queen – or King.
Do bear in mind that laws and tax rules may change in the future and the information here is based on our understanding in April 2016.
Personal circumstances also have an impact on tax treatment. Investments can go down as well as up and you may get back less than you pay in. The information in this blog or any response to comments should not be regarded as financial advice.