Do I still need to buy an annuity?
BY Harvey Jones
1st Jan 2015 Pensions & Retirement
Under pension freedom reforms the over 55s are no longer obliged to buy annuity, an income for life, with their pot. Instead, they are free to convert their personal and company pensions into cash. More than 300,000 people seized the opportunity last year but there are still reasons why an annuity might be right for you.
Annuities annihilated
Annuities fell out of favour due to record low interest rates and widespread resentment at having to lock into a lifelong contract.
The moment pension freedoms were announced, annuity sales plunged. Just 80,000 people a year now buy one, down from around 400,000 before.
Many over-55s now opt for income drawdown, which involves leaving your money invested and drawing income as you need it. This is right for some, but not everybody.
Guaranteed income
Annuities have one major advantage that you cannot get elsewhere: they pay a guaranteed income for the rest of your life, no matter how long you live.
This is particularly important as life expectancy continues to rise, which means your annuity is likely to pay out for longer.
Cry freedom
The big danger with cashing in your pension is that you will spend the money too quickly, and deplete it before you die.
Many could spend their final days scraping by on the state pension, and may also be blocked from claiming means-tested benefits if the authorities deem they spent their pension recklessly.
This will not happen with an annuity, the income will keep rolling for as long as you do.
Half and half
However, annuities are inflexible, and you cannot leave the money as an inheritance when you die.
Many with smaller pensions will simply go for the cash. However, those with larger pots could use, say, half to buy an annuity, to provide a basic income to cover your everyday retirement costs.
You could then leave the rest invested to benefit from any future growth, giving you the best of both worlds.
A new breed of flexible pension plan allows you to do just that. You might want to take financial advice to see what's out there.
If you do opt for an annuity, remember to take the “open market option”, and shop around for the best rate rather than simply buying what's on offer from your pension company.
Rates recover
The good news is that annuity rates have started to pick up, and could recover further if interest rates finally start rising.
Currently, a £100,000 pension pot will give you level annuity income of around £4,500 a year, which isn't much.
Many will continue to shun annuities as a result, even though they offer something you just cannot get elsewhere.
HOW WE CAN HELP
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