Helen Morrissey, head of retirement analysis at Hargreaves Lansdown: “With interest rates set to continue on a downward trend the expectation is that we will see annuity rates start to fall back in the coming months. After years on the retirement income sidelines, the higher interest rate environment ushered in a golden era for annuities as income soared. They’ve since fallen back from their highs, but with a 65-year-old with a £100,000 pension currently able to get up to £7,104 per year from a single life level annuity, they are still offering good value.
It’s also important to say that we aren’t expecting the Bank of England to cut interest rates anywhere near as quickly as they raised them. Any falls in income should be much more gradual so you shouldn’t feel pressured into making a snap decision. Once bought an annuity cannot be unwound so you need to make sure you are considering all relevant factors in your decision.”
Five key factors to consider when purchasing an annuity.
You don’t have to annuitise at once.
You are under no obligation to annuitise all your pension at once. You could be retired for twenty years or more and your circumstances could change massively in that time. Annuitising in stages will also enable you to benefit from higher annuity rates as you age.
It’s not either annuities or income drawdown – you can have both.
You can utilise both income drawdown and annuities in your retirement income strategy. Annuities can be used to secure a level of guaranteed income to help you meet your day to day needs while the rest can remain invested in income drawdown where it has the potential to grow, and you can draw down as needed. It’s a great way of harnessing the important guarantees that come with annuities with the flexibility of income drawdown – it shouldn’t be an either-or decision – you can use both.
Check the whole market.
Once an annuity is bought it cannot be unwound so make sure you compare the whole market before you take the plunge. Using an annuity search engine will enable you to input your details and get a range of options from the different providers so you can choose the option that best meets your needs. Provider quotes can differ by hundreds of pounds a year which could amount to thousands of pounds over the course of a retirement.
Consider all your circumstances.
When looking at a range of options it’s tempting to choose the one which offers the highest income at outset. However, you need to consider all your circumstances. A 65-year-old with a £100,000 pension may be able to get up to £7,104 per year from a level single life pension but if they were to die their spouse could be left with nothing. A joint life annuity can deliver up to £6,493 per year according to HL’s annuity search engine -it’s a lower income but gives you the peace of mind that if you were to pre-decease your spouse then they would continue to get an income.
Be honest about your health.
With an annuity it really does pay to be honest when it comes to your health conditions. Including details as to whether you smoke or have a condition such as diabetes can really push up how much income you receive. Recent data from HL’s annuity search engine shows including details such as whether you have had a stroke could push your income over £8,400 per year while someone who smokes ten cigarettes a day could receive over £7,600.
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