“For those approaching retirement, news that annuity rates have hit a 25 year low mean the cost of securing a guaranteed income for life are at an all-time high. Annuity rates have fallen in recent years because of gilt yields also being at an all-time low, coupled with life expectancy continuing to rise. The perceived poor value of annuities was one of the drivers behind the pension freedoms, introduced by George Osborne back in 2015. These opened up a new world of flexibility to all those with defined contribution pension pots, allowing people to choose to remain invested and draw an income of as little or as much whenever they chose from as early as age 55. Previously, drawdown was typically only chosen by those with larger pension pots, but has now overtaken annuities as the most popular choice.
“While drawdown comes with many benefits compared to annuities, it also presents new risks to consumers. The major benefit of an annuity is it provides a guaranteed income for however long someone lives, but the main downsides are the lack of any flexibility to adapt to changing circumstances during retirement and the historically high price. By comparison, drawdown offers full flexibility to take however much or little income is needed and to vary that as circumstances change. An increasing number of people are choosing to ‘transition’ into retirement, continuing to work in a reduced capacity and supplementing this by drawing some income from their pension. In drawdown, individuals can choose where to keep their pot invested, hopefully benefitting from ongoing investment growth, and any remaining fund can be passed on to a chosen beneficiary on death. But the big downside is if too much is taken out too soon, or if investments don’t perform as well as hoped, the pot can run out before the individual does.
“With so much choice, coupled with no-one knowing for sure how long they will live in retirement, we always recommend people seek advice. For many, it’s not an either / or choice. Some will use part of their pension pot to buy an annuity, providing enough guaranteed income to cover retirement essentials, leaving the rest invested in drawdown to be used flexibly as and when required. Once in drawdown, there’s also the opportunity at any time to use any remaining funds to buy an annuity. While it’s not possible to tell with any certainty, it’s possible that a future Government will fund increased public spending with greater public debt, which could lead to gilt yields rising in future years, and in turn annuity rates rising from their current all-time low.”
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