Annuities: What next?
09/07/2010
by Lois Avery
Annuities have hit the headlines lately as the Government sets to work on the biggest pension system reforms for 20 years, but with falling rates and new rules what does the future hold for annuities?
Annuity rates are at an all time low with no signs of an increase, meaning pensioners who buy an annuity now are not getting a great deal of income for their money. And in another blow there is now speculation that the tax free lump sums, which is an incentive to buying an annuity, are to end. The Government also announced that the age 75 rule will be phased out before being scrapped altogether.
But what do all the changes mean?
Compulsory annuitisation
At the moment an annuity has to be purchased by the age of 75, meaning pension savers are left with little flexibility on their retirement fund.
But thanks to the new rules there has been an extension, meaning people have until the age of 77 and in 2011 the compulsory annuitisation rule will be scrapped completely.
The age 75 rule meant that pensioners were often forced to settle for a low rate in order to buy an annuity in time.
Head of pensions and investments at Fair Investment Company Nick Scarrett praised the decision.
"Instead of being forced to buy an annuity at 75 and having to take the rates available at that time, pensioners are being given the choice of when and even if they want to buy an annuity with their pension fund,” he said.
But the good news surrounding annuities has been blighted by statistics, which show that rates are at an all time low. You may be able to wait longer to buy an annuity but with rates sinking is it worth it at all?
Falling rates
Rates are set by the insurer and are based on how long you’re expected to live, taking into account lifestyle and health implications. They’re set by the insurer but have been falling steadily for years but have taken a further hit since the Budget.
Put simply, the lower the rate the less retirement income is paid out by annuity providers.
Saga was the only one of the main annuity providers not to cut rates following the budget last month with Legal and General, Canada Life, AXA Sun Life and Standard Life all cutting rates.
So why buy an annuity?
Despite the obvious limitations, annuities offer certain securities that cannot be matched with other pension saving methods.
Firstly, they allow you to take a chunk of your pension pot tax free. So if you use £100,000 to buy an annuity you can take 25% back tax free. And unlike saving into an ISA, which allows flexible withdrawals, an annuity lets you manage your pension by providing regular income payments.
Enhanced annuities
Annuities also take into account your health and overall life expectancy. So if you are affected by certain conditions, or are a smoker, you could get more money every month, based on the insurer’s calculation that you are unlikely to live as long as someone deemed to be in good health.
In one case study a customer ‘s income was increased by 39 per cent once her health conditions were applied to her application to buy an annuity with a fund of £10,052. It increased from £462 per annum to £664.
Do your research
But whether you think an annuity is a good deal for your pension or not the advice is still to shop around.
Research conducted by the Association of British Insurers indicates that around one-third of annuitants shop around then buy from an alternative provider, one-third shop around then buy from their existing provider, and one-third do not shop around at all and ‘default’ into their provider’s annuity.
Nick Scarret added: “People need to be better educated about the importance of having sufficient retirement planning in place. It has never been more important to look at retirement planning, and that doesn't just mean standard pensions, there are plenty of options, for example, ISAs, investment bonds, venture capital trusts and unit trusts/OEICs.”
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© Fair Investment Company Ltd
Quotes based on man aged 65, £100,000.00 purchase amount, conventional, level escalation, nil guaranteed period, paid monthly in arrears without proportion. Annuity rates correct as at 22/06/2011.
Quotes based on male smoker (20 cigarettes per day) aged 65, £100,000.00 purchase amount, conventional, level escalation, nil guaranteed period, paid in arrears without proportion. Annuity rates correct as at 23/11/2011.
Quotes based on a woman aged 65, £100,000.00 purchase amount, conventional, level escalation, nil guaranteed period, paid in arrears without proportion. Annuity rates correct as at 23/06/2011.
Quotes based on a woman smoker (20 cigarettes per day) aged 65, £100,000.00 purchase amount, conventional, level escalation, nil guaranteed period, paid in arrears without proportion. Annuity rates correct as at 23/06/2011.
Quotes based on man and a woman aged 65, £100,000.00 purchase amount, conventional, level escalation, nil guaranteed period, paid in arrears without proportion, spouse/partner annuity of 66% payable on first death without overlap. Annuity rates correct as at 23/06/2011.