Buying an Annuity is certainly the most popular way of turning a pension into an income and whilst it certainly has the benefit of simplicity, is it always the best option?
We thought we would look at five reasons why you might not want to buy an Annuity and why other options might be better.
1. Annuity rates are low
Over the past year research has shown that Annuity rates have fallen by over 10%. Despite these falls there has been speculation that rates could start to rise over the next couple of years as economies around the world start to improve. Once you have bought an Annuity it can never be changed, you are therefore locked into the Annuity rate on the date you buy. If Annuity rates do rise and you have bought now, you will be able to do nothing to take advantage of possible higher rates in the future.
2. Your health may deteriorate
As you get older your health may deteriorate, which could mean you qualify for an Enhanced Annuity, but this opportunity will be lost if you have already purchased an Annuity. An Enhanced Annuity pays you a higher income if you suffer from health problems or have lifestyle issues which could reduce your life expectancy. However, if you buy an Annuity when you are healthy, even if you become ill in years to come, you will have lost our on this opportunity.
3. Other options may be better
An Annuity is only one option to turn your pension into an income. Others such as Income Drawdown (also known as Capped Drawdown), an Investment Linked Annuity, or a Fixed Term Annuity are available.
Each option has advantages and disadvantages but you really should consider each one in turn before you finally make your decision.
4. You want a lump sum to be available on your death
An Annuity can only provide an income on your death to your husband, wife or civil partner and other generations of your family cannot benefit. If you want to leave a lump sum to your dependents or to younger generations of your family then an Annuity is not the right option; Income Drawdown and a Fixed Term Annuity could both work and should therefore be considered.
5. Your circumstances might change
Once you have bought an Annuity it can never be changed. This can often mean you have bought benefits and options in case they are needed, but that will actually never be used. For example, if you buy a spouse’s pension, with the best intention of helping your husband or wife, but they die before you, the money spent on adding the spouse’s pension to your Annuity has been lost.
Other retirement income options allow for alterations to be made to reflect changes to your circumstances. If you think your personal circumstances may change it is worth considering other options than just an Annuity.
But I need income now
Many people don’t like the idea of buying an Annuity now, but do need to create an income on which to retire. This problem can be solved by considering other retirement options such as Income Drawdown or a Fixed Term Annuity, both of which will create an income now without the need to lock into today’s Annuity rates.
Right for some, not for others
As with any financial product an Annuity is right for some, but not for others. If you want a simple solution, which will give you a guaranteed income for the rest of your life then it is likely that an Annuity is the right choice. However, if your circumstances could change, or you don’t want to lock into low Annuity rates of today, then you should consider other options.
Phillip Bray writes for Investment Sense looking at the best way of creating an income in retirement, from starting off using a basic pension annuity calculator to making the final decision which retirement income option to choose, Phillip provides easy to understand guidance for people close to retirement.