Are annuities worth a look?
Here are 4 features that might turn your head...
An annuity is a guaranteed income you can buy that'll be paid for life – what most of us would call a pension. Since we’ve had more freedom to take our retirement savings in different ways, annuities have had a bit of a bad rap and not always been seen as the best value for money.
But with interest rates on the rise and market uncertainty seemingly part of the ‘new normal’, annuities are an increasingly attractive option for some.
Here are 4 reasons why:
It's. For. Life.
At age 65, exchanging a savings pot of £100,000 for an income of say, £4,000 a year might not seem like great value. But one of the most undervalued things about an annuity is that it’s paid for life (and possibly your partner’s too). Don’t underestimate how long this might be. Let’s look at the numbers…
A typical 65-year-old, in good health, in January 2022 could expect to reach at least age:
87 for women | 85 for men
So, if you retire at age 65, you could live for at least 20 years after that (based on data from the Office of National Statistics). But we’re not all ‘typical’. It's possible you might live for much longer than this. In fact, a 65-year-old retiring today would have a:
- 1 in 10 chance of living into their mid to late 90s, and
- at least a 3% chance of living to 100.
So, when you think your annuity might be paid for up to 35 years – the numbers definitely start to add up. Work out your own life expectancy numbers.
It's flexible (kind of)
Putting aside the ‘locked in’ feature we just mentioned, you do have annuity choices – this makes them more flexible than you might first think. For example, you choose:
- When: You don’t have to buy an annuity as soon as you retire. You could wait – perhaps until you get a better rate. In fact, the older you are, the more income you might get as your annuity is expected to be paid for less time.
- How much: You don’t have to lock in all your savings at once. You could buy an annuity with some to benefit from the security of a minimum level of income (perhaps enough to cover the essential bills?). You could then access the rest of your savings differently; for example, keep them invested to use as and when you need them.
- What type: You can buy an annuity just for you or one that’s paid to your partner (after you die). You can guarantee payment for a certain period – say 5 or 10 years, and/or choose if you want your income to be fixed or to increase over time to keep better pace with the cost of living.
It's secure
OK, so it’s true that once you buy an annuity, you can’t change it, but for some that’s a plus – job done. You know for certain how much you’ll have, and you don’t need to worry about that money running out.
You also don’t need to watch the markets, think about how to invest, and spend time managing your choices – you can just get on with living life.
Annuities can be good value
How much you could get as an income depends on annuity rates (the rate for turning your pension savings pot into annual income). Annuity rates change all the time and depend on things like your age, your health, interest rates, and government bond prices. If any of these factors change, like interest rates going up (as they are now), you could get a better deal when it comes to buying your annuity.
It also pays to shop around – according to a 2019 Which? Report shopping around could improve your income by as much as 20%. The DC Plan uses a company called HUB Financial Solutions to help members find the best deal. The cost of this service is paid for by the DC Plan (you don’t have to use this service and can sort out your annuity yourself).
Retiring isn’t an ‘all or nothing’ choice.
You have lots of options for how you take your DC savings – annuities are just one, but they’re worth exploring. Remember that you can also mix and match and/or make different choices at different times. It’s your call.
Please note, external links and content are selected and reviewed when the page is published. However, the Trustee and WTW are not responsible for the content of external websites.
Some things you may like:
Looking for peace of mind?
About using your DC savings to purchase an annuity and who this option might suit
