18th December 2014 at 8:28am
What role are annuities likely to play in retirement planning in the light of pension freedoms coming into effect from 6 April 2015.
There has been much debate about annuities, particularly since Chancellor George Osborne announced a number of welcome changes to pensions from April 2015.
Those changes mean pensions are becoming more flexible with savers being given the freedom to control the pension funds they’ve worked hard to save – it is their money after all. They can take those funds as and when they choose to from the age of 55. This means people will have more options than simply buying an annuity at retirement, as was the case for many previously.
That doesn’t mean we have seen the last of annuities – far from it. True, you can’t change your mind when you buy one, but they do have the advantage of giving the security and certainty of a guaranteed income for life, or for a period of time of your choosing. And, as annuities work like insurance, if you have serious health issues you’ll benefit from enhanced rates. There’s also the added attraction that some annuities guarantee an income for your spouse too, in the event of your death.
On the other hand, they don’t offer much in the way of flexibility. What if you needed a lump sum to cover an unexpected event, a new car, or wanted to help pay for one of your grandchildren to go to university?
For that reason, and with the pensions changes now giving savers many more options, we’re likely to see annuities becoming part of a varied pensions mix, alongside lump sum withdrawals and flexible income, or what is known as drawdown.
So using some, not all, of your pension funds to buy an annuity would give you a guaranteed level of income and peace of mind that life’s essentials were covered. The remaining funds could be kept invested in a pension to provide a flexible income and lump sum withdrawals when you need them.
Another trend we could see emerging is savers keeping their options open for longer by choosing flexible income and buying an annuity in their later years when they’ll get a better annuity rate – and the reassurance of a guaranteed income.
One thing is certain – the way we look at our retirement planning will never be quite the same.