Don’t get talked into buying an annuity. With the right information and research, you should decide whether an annuity is the best choice for you. So what is an annuity? Simply put, an annuity is a product sold mostly by insurance companies. In exchange for a lump sum, they will provide you with a guaranteed income for life in your retirement. A lot of annuities are fixed in nature. The majority of them do not take inflation into account. There are variable annuities as well, whereby your investment can increase or decrease in value. In the right circumstances, annuities can play an important part in retirement income planning. Let’s look at an example whereby an annuity is taken out with a partner. Upon the death of the first policyholder, the income amount can fall up to two thirds. With this in mind, the highest paying annuity will be one which finishes when you die so nothing gets passed on.
What are annuity rates based on?
The annuity rates can depend on a number of factors. There are certain market influences which have an impact. Examples include interest rates and government gilt yields. An insurance company will most likely invest your lump sum in a long-term government bond. Depending on the yield of that bond, you will get the appropriate return. With increasing life expectancies, the income paid out tends to also be lower.
An annuity may not be the best option for you if:
- You have previous investment experience and you can manage your own money. Basically, by buying an annuity, you are giving control of your retirement fund to an insurance company in return for a guaranteed income for life. That doesn’t sound so bad, but if you leave a spouse behind, in most cases she will no longer get any of that income or a reduced amount. You can find suitable funds who can generate an income instead.
- Your retirement plans might change. With annuities usually, there are high associated initial fees. Even if an income is guaranteed for life, the retirement fund will not grow by much. Therefore you can invest your money in low-risk funds and begin to draw down at retirement instead. If something terrible were to happen to you and you would require a much higher payout, your monthly income from an annuity would still stay the same. Therefore you lose control of your funds with no emergency strategy nor a higher growth.
What are your options for taking income from your pension:
- Annuity rates have steadily been dropping, especially now with Brexit. They are said to have fallen at a record low.
- With the introduction of the Pension Freedom Act 2015, the popularity of buying annuities has dropped. People have been buying fewer annuities since then. From the ages of 55-60, pensioners can access 25% tax-free lump sum from their pension pot. This is called Flexi access drawdown. Once you start drawing down your funds in this way, you can opt to take a part or all of your money. With an annuity for expats, the earlier one retires, the lower the annual income will be. Nonetheless, if you were to invest your money in well-performing funds, they should well outperform the annuity rates offered at the moment.
- It is also worth mentioning that some people will only have a capped drawdown option after transferring a pension. Basically, this means that the person has already accessed their pension prior to the 6th of April 2015. This is whereby they took a lump sum out or income. The level of income received was ‘capped’ at a maximum level. A financial adviser can advise you if it is possible to convert capped-drawdown to flexi-access drawdown.
So what should you do?
Annuities are sometimes seen as a safer investment option. They are used to get a consistent income in retirement so compare different annuity rates. If you have made up your mind that an annuity is the right choice for you, make sure you shop around. Look for the best offer and highest paying income with different insurance companies and that you are aware of all the terms and conditions.
Get advice from an international expat adviser. Make sure you provide sufficient information regarding your health and family situation. Sadly the worse your health or habits are, the higher the annuity rate. This is known as ‘enhanced annuity’. The majority of advisers should give you an in-depth document called a Fact Find which will capture the most relevant and important information. This will enable the adviser to provide you with a bespoke solution based on your circumstances.
Get impartial free advice from Pension Wise – This is a UK government website which offers free and impartial guidance on the options available to you on your Defined contribution pension.
See how Harrison Brook can assist
At Harrison Brook, we can assess your situation and further advise on annuity implications and we can also provide you with fully independent advice.
Get in touch today to discuss more on different drawdown options available to you and see how we can assist.
The information contained herein is for informational purposes only which is subject to change and should not be relied upon. You should seek advice from a professional adviser before embarking on any financial planning activity.