Is an Annuity Right for Me?

In most cases taking an annuity is for life. If you cannot change your mind it is important to make the right choices before you make any decisions. There are several types of annuity and some alternative retirement options that may be better suited to you at this point in time.

The purchase of a basic annuity is simply a transaction whereby you exchange your pot of money for an income for the rest of your life. The annuity you buy will have certain options or features which you can choose. The more options and features you want the less income you will get. Equally, and to improve your benefits, the older you are and the worse your health and lifestyle the more you will get. Annuities calculated this way are referred to as Enhanced Annuities.

Annuity rates are driven by commercial markets and like anything else you buy the value you get or the price you pay will vary significantly.

As a rule of thumb, do not accept the annuity offered by your existing pension provider as it is unlikely to be the best available.

If you are seeking the comfort of a known income now and do not wish to accept any risks at all then a standard annuity is probably for you.

Besides the competition between providers to sell you an annuity the two key market factors in you obtaining best value for money will be interest rates and the value of your pension fund. Low interest rates mean low Gilt Rates, which to a large extent secure the income you receive, and the smaller the fund size the smaller the income you will receive.

Interest rates look set to remain low for some time as Governments around the world look to give confidence to the markets and your pension fund value is probably some way down on its mid 2007 high.

If you feel that markets will improve over time then you may wish to consider an investment backed annuity. These start low and are designed to provide increasing income as values increase.

If you feel that markets will improve over time then a short term or temporary annuity would give you the opportunity of security for a set period of time and the opportunity to re-apply at a later date.

If you feel markets will improve but you don’t want to or can’t wait to take benefits an acceptable short term solution may be to enter into an ‘unsecured pension’ or drawdown pension. This allows you to take either just tax free cash, or tax free cash and income, whilst leaving your fund invested to a time when market conditions are more favourable for you to lock into an annuity.

If you have a large fund the unsecured or drawdown pension may be a better long term option as it has certain advantages in relation to the maximums you can take out and how they can benefit your spouse or next of kin when you die.    

The options are available and whilst the decisions may not be easy we are here to help.  Enquire now.