Annuities: What Are They?



Posted on: 14th July 2014

A retirement annuity is an income that is bought once with a pension pot and lasts for the rest of the holder’s life.

A pension company will work out how long the pensioner is likely to live and will offer an income.

If the buyer lives longer than expected, the provider makes less money than anticipated, or a loss. If the buyer dies sooner, the pension firm often keeps the difference.

When you think about it, annuities make a lot of sense. The idea is that they place people’s long-term financial planning firmly in their own hands. You could get a better outcome, without one, but others will burn through their money too quickly,

All Change

The system of Annuities, is currently under scrutiny. In February the Financial Conduct Authority, the City watchdog, concluded the pensions market was not working following a review into the “disorderly” annuities market, which shut out savers with smaller pensions and provided bad deals for loyal customers.

And so, a change in pension rules was heralded in the chancellor’s Budget speech 2014.

What this means is that you, as a retiree can now draw your entire pension in one go, if you want to. It’s a decision that will enable some, the freedom they need in retirement.

The Cons?

If you choose not buy annuities, you may enjoy better outcomes, but on the other hand you could burn through your money too fast.

The annuities have been criticised in the past by pensions experts is because firms may not have calculated payments and often add fees. And ultimately people did get a bad deal in the past if they were buying during the downturn. That’s not to say that it’s still not a good idea.

Annuity Protection.

With the new guidelines in place people who buy an annuity from their existing provider will be safeguarded from the possibility of not getting the best deal. .

Annuity rates recently recovered to about 6% after hitting an all-time low in 2012 of about 5%, according to Which? But when you think that the average return from a pension pot at 65 was 15% in 1990, it doesn’t sound as great.

Many believe annuities remain an important part of retirement planning.

Are you thinking about retirement? If so, get in touch now.