This week, Wealth Manager Melissa Thorogood discusses the renewed popularity of annuities. Pension freedoms and flexi-access drawdown were introduced in 2015, changing the retirement landscape. However, challenging markets combined with rising interest rates and inflationary price pressures have underscored the need to consider a form of guaranteed lifetime income in retirement.
It's been so long since annuities were really an option for clients that you could be forgiven for having forgotten what they are or how they work.
Essentially, an annuity is a contract between an individual and an insurance company, involving the exchange of accrued pension benefits for a guaranteed income over a predetermined period.
The 2008 Global Financial Crisis and the plummeting interest rates that ensued all but eliminated annuities from the retirement income mix. However, they have recently hit a 14-year high as a result of the Bank of England’s change of monetary policy from expansionary to contractionary in order to stem inflation. As a result, we find ourselves encouraging our clients to consider annuities as part of their retirement strategy, alongside the more flexible options offered through flexi-access drawdown.
Annuity rates are subject to the same levels of volatility as other markets. Although we are unlikely to see the levels of change that the aborted mini-budget brought with it, rates do move up and down. It might be a good idea to “phase” your annuity purchase as you age. This way, you avoid locking into a particular rate, and you might be able to benefit from an improved one as you age and your health run the risk of deteriorating.
As with all elements of retirement income planning, annuities are far from straightforward as the right balance between guaranteed income and flexibility is inextricably linked to each individual’s circumstances and objectives.
The recent changes to pension legislation through the recent Spring Budget serve as a timely reminder of the ever-changing regulatory landscape for those looking to enjoy the assets they have worked so hard to accumulate during their working lives and the value of having a trusted adviser working alongside them.
Annuities aren’t for everyone. However, if your ideal retirement is one in which your finances are simplified and guaranteed, then they may be right for you. The best thing to do is to investigate the pros and cons when you next check in with us.
