With the recent spike in interest rates, annuities have re-emerged as a popular option for individuals seeking a stable income stream during their retirement. Annuities offer a way to plan for the future and ensure financial stability, making them an important consideration for anyone looking to secure their post-retirement life.
Understanding annuities
An annuity is a contract between an individual and an insurance company or financial institution. The aim is to provide a guaranteed income for life.
Types of annuities
1. A lifetime annuity
This is where you give all or some of your pension funds to a provider and in exchange, they will give you a guaranteed income for as long as you live. You can also build protection against inflation and provide a spouse or partner with an income for life if you were to pre-decease them. Once the annuity is set up, the level of income, frequency, and options you choose cannot be changed.
2. A fixed term annuity
This also gives you a guaranteed income but for a fixed period. At the end of the term, you may have the ability to use any residual funds to provide further benefits.
With this option there is a risk that changes in market conditions could mean the maturity amount you receive at the end of the fixed-term period isn’t enough to provide you with the retirement income you may then need, moving forward. This might be because annuity rates have fallen during the fixed-term period.
However, it’s also possible that the retirement income you could buy at the end of the fixed-term period is higher, perhaps because annuity rates have improved, or your health has deteriorated so you’re eligible for a higher enhanced annuity.
Benefits of annuities
Advantages
The benefits of purchasing an annuity are:
- It provides a guaranteed level of income for life or a set period.
- It can allow you to take the maximum amount of tax-free cash under HMRC limits.
- If you are purchasing a Lifetime Annuity there is the simplicity of making a ‘once only’ decision
- Flexibility in deciding what annuity basis will best suit your individual needs.
Drawbacks of annuities
Disadvantages
The disadvantages of my recommendations are summarised below:
- If you were to choose a level annuity, inflation can decrease the purchasing power of a level annuity.
- An annuity cannot be altered once set up.
- Income payments will be subject to income tax, based on your marginal tax rate.
- You may not receive back the amount you paid for the annuity, should you die earlier than expected.
Comment
Annuities can play a role in a comprehensive retirement strategy by providing a reliable income stream and offering protection against outliving savings. While they come with both benefits and drawbacks, understanding the various types of annuities and their implications is key to making an informed decision. Before committing to an annuity, it’s advisable to consult with a financial adviser who can assess your individual circumstances and guide you toward the most suitable option.
How can Nelsons help
Alexandra Black is a Paraplanner in our expert Investment Management team, providing support to our Independent Financial Advisers, researching products and funds, producing technical reports detailing the Advisers’ recommendations for the clients, Financial Conduct Authority returns, and file checks and risk reviews
For advice on or further information in relation to the subjects discussed in this article, please contact Alexandra or a member of the team in Derby, Leicester, or Nottingham on 0800 024 1976 or via our online form.
Contact usPlease note that the value of an investment and the income from it could go down as well as up. The return at the end of the investment period is not guaranteed and you may get back less than you originally invested.