Annuities make a comeback as interest rates soar

Interest in pension annuities is soaring as rising interest rates are leading to better annuity deals. Historically seen as unattractive by many, pension annuities are now offering a much higher income than in previous years, leading many to seriously consider them as a retirement option again.

Ten years ago, you could purchase a pension annuity that would pay a guaranteed annual income of around 4 per cent. So, for every £100,000 of your pension fund converted into the annuity, you would receive an annual income of £4,000 for the rest of your life. Within those 10 years, however, annuity rates fell sharply with interest rates leading to people to turn there back on the once go to option for retirement planning. Now, with interest rates potentially peaking, you can buy a lifetime annuity that offers as much as 7 per cent, nearly double what you might expect to get even a decade ago.

The Association of British Insurers found that sales were up a staggering 22% in the first three months of the year, the highest level in nearly five years. Experts are saying that the income now on offer from current annuity deals compares to the value before the 2008 financial crisis happened and plummeted interest rates to record lows. 

What are pension annuities?

A pension annuity is financial product that you can purchase for a lump sum that pays you a regular and guaranteed income for the rest of your life. 

When you plan for retirement, a crucial part of the process is to ensure that you have enough income to live comfortably. One way you can do this is to use the pension pot(s) that you’ve accumulated to buy a pension annuity. By using your pension pot to purchase a pension annuity, you are essentially converting your pension into a regular, guaranteed income. 

Types of annuities – is an annuity right for me?

The most common type of annuity is a ‘Lifetime annuity’. A lifetime annuity plan provides regular payments for the rest of your life. The amount of these payments depends on when you purchase the annuity, the age you are when you make the purchase and the total amount you are willing to spend.

Some other less common types of annuities include ‘Joint’ and ‘Enhanced’ annuities. 

With a joint annuity, you can nominate a member of your family, such as a spouse or dependent, to continue to receive a portion of the income of your annuity once you pass away. It should be noted that the nominated person will only receive a portion of your original income. How large a portion this is will depend entirely on the agreement set between you and the provider when you purchased the annuity.

Enhanced annuities function much the same way as regular annuities, except they take your health and history into an account in order to offer a higher rate to those who meet specific criteria. For example, if you are overweight or have a hazardous job, you may be offered a better deal, based on the perceived risk of shortened life expectancy.

Essentially, both you and the provider make a gamble when you purchase an annuity. As morbid as it sounds, the provider is gambling you will pass away before a set date, and you are gambling that you will live at least as long as a set date. It’s all based around value over time, and the total amount you will receive depends entirely on the amount of years you live past the point of purchasing the annuity.

It should be noted that Annuities are not tax-free, so you may be liable to pay income tax if your total income exceeds the personal allowance of £12,571 a year. On income of £12,571 to £50,270 a year, you are taxed at 20 per cent. For earnings between £50,271 and £125,140, the rate is 40 per cent, and above this it is 45 per cent.

If you bought an annuity within some of your retirement savings and drew down the rest, you could potentially keep your income below a particular threshold.

Finding the right retirement options for you can often be difficult to determine especially when deciding if you’re getting good value on your investment. If you’re considering purchasing an annuity or simply interested in planning for your retirement, why not get in touch. 

You can book a free non-committal initial consultation where you can discuss your savings plans with one of our accredited advisers who will be happy to guide you through the process. Alternatively, you can give us a call on 0333 323 9065 to speak to a member of our team straight away. 

 

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Note: this article is intended for general information and should not be taken as individual financial advice. The value of investments can go down as well as up, returns are not guaranteed and you may not get back what you originally invested.