Last year, Money Marketing confirmed that a quarter of pension savers had halted or cut their pension contributions due to the coronavirus pandemic, with long-term implications for pension savings and attainable lifestyles in retirement.
Not only has the pandemic led to fewer – or lower contributions – but it has also affected the returns you might see, especially if you opt for a traditional annuity.
A recent FTAdviser report suggests that after years of poor rates, the pandemic has caused a further drop in average annuity amounts.
If you are approaching retirement, you might ask what this means for the future of the traditional annuity? Is it still an option, and if so, how can you best incorporate it into your retirement planning?
Moneyfacts find a drop in average annuity compared to pre-pandemic
Money comparison experts Moneyfacts have found that the pandemic has caused a £159 a year drop in the average annuity.
This represents an overall drop compared to pre-pandemic levels, despite a small rise (£86) since the height of the initial lockdown in May 2020.
Even before the pandemic, however, annuity rates were dropping – by 4.3% in the four years following the introduction of Pension Freedoms in April 2015.
While rates are low currently, there are still good reasons to consider an annuity as part of your overall retirement planning. Here are five of them:
5 reasons to consider an annuity
1. Regular payments can cover fixed expenses
Annuity rates and average annual amounts might be low currently, but a regular, known income could be the perfect way to cover fixed expenses like household bills.
An annuity, once in payment, continues for life. It might even continue to provide for your spouse or loved ones after you are gone. A spouse’s pension or a guarantee period (that guarantees to continue paying the full annual pension for a set period, even if you die within that period) could help cover the bills of those you leave behind.
You’ll need to be aware that both a spouse’s pension and a guarantee period will lower the annual pension amount you receive.
2. Budgeting made simple
While Pension Freedoms have given you increased flexibility, these options also place additional budgeting responsibility on you.
Taking your whole pot as a lump sum – or a series of lump sums – will mean you have to carefully manage your spending.
Managing flexi-access drawdown can also be difficult. Stock market downturns can mean you have to sell more units to release the same level of income. You’ll also need to be careful you don’t withdraw more than you need. You’ll likely leave this amount in a savings account where it is at risk of devaluation through inflation.
An annuity, on the other hand, makes budgeting easier and because it pays for life, you won’t need to worry about your pension pot running out.
3. An annuity can increase to combat inflation
Although an annuity, once in place, cannot usually be altered, that doesn’t mean the payments you receive have to stay the same. You might opt for an annuity that rises each year to combat inflation.
Rising inflation can seriously affect the buying power of your pension.
An escalating pension might rise by 3%, 5%, or 7% each year, for example, or be linked to the Retail Prices Index (RPI). This could help to ensure you can cover household bills, even as inflation increases their cost.
4. The pension commencement lump sum (PCLS)
When you take an annuity, you’ll be able to access up to 25% of your defined contribution (DC) pension pot as tax-free cash. This pension commencement lump sum (PCLS) could help to pay for discretionary, one-off luxuries or to clear a debt.
You don’t have to take the full 25% so you can match the amount you take to your needs.
You should also be aware that taking tax-free cash will lower the fund available from which you can purchase an annuity, thereby lowering the pension you receive.
5. Regular income can leave you free to create flexibility elsewhere
You opt for an annuity with one pension pot to create flexibility with another, knowing your fixed expenses are covered.
Budgeting with flexi-access drawdown, for example, might be easier if you know your withdrawals are specifically to cover discretionary expenses – such as holidays or other luxuries.
A good retirement plan will look at all your potential pension, and non-pension income, ensuring that you enjoy your dream lifestyle.
An annuity and flexible hybrid might be the perfect way to achieve this balance.
Get in touch
While the traditional annuity has fallen out of favour in the wake of Pension Freedoms, a regular and known income could still have a place in your retirement planning.
By taking a holistic view of your finances, we can help you put a plan in place that makes the best use of the various income streams available to you, and the tax efficiencies of each.
If you would like to discuss any aspect of your long-term retirement plans, please contact us today.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
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