Why annuities may still have a part to play in your retirement income

Despite this year’s Budget announcing future greater access for pension funds and more freedom for people to make decisions about their retirement income, the death of annuities may have been over-exaggerated. While a Towry survey has shown that 76% of retired people did not take out an annuity product during their first year of retirement, annuities can still be useful if a person’s circumstances change during retirement.
 
Andy James, head of retirement planning, Towry outlines five points that may act as a trigger for retirees to buy an annuity product:

1. You may experience poor health.  Buying an annuity is one of the few times of life when suffering poor health could be a ‘good thing’. This is because many annuity firms pay significantly higher incomes if they expect you to have a shortened life expectancy to reflect the shorter time over which they believe they will be making payments to you. Similarly, the regular income which an annuity provides may help pay the costs of long-term care.

2. “Your attitude to risk may change. As you get older, you may find that your need to take risk and your appetite for taking risks with your investments may reduce.  Income drawdown, the traditional alternative to an annuity where income is drawn directly from invested funds, requires regular reviews and careful monitoring which is more expensive and complex. Therefore, particularly as you grow older and the cost of your retirement becomes clearer, the comfort of greater certainty and simplicity may outweigh the risks of greater flexibility, making an annuity a more attractive option.

3. You may have recently lost a partner. The loss of a partner is a time of enormous confusion and upheaval. Although you may inherit extra capital and income upon their death, many of your costs will remain the same and there will be many matters to take care of. The certainty that an annuity brings may therefore provide a very welcome counterbalance for the uncertainty you may be experiencing after bereavement. Also the cost of a single life annuity will be lower than that of an annuity looking to provide benefits for a partner as well.

4. Major changes to legislation. This year has seen some of the most wide-ranging pension proposals ever outlined by a Chancellor. The opportunity for many of us to potentially access our full pension pots (albeit subject to tax) is unprecedented. However, with pension tax relief being a hot political topic, changes have been frequent and further amendments cannot be ruled out. In such an environment, many may decide that the uncertainty of political decisions, and parties in power, could negatively impact on their own retirement fund. An annuity provides stability in the form of regular lifetime payments, which has survived relatively unchanged regardless of party politics.

5. Your assets may have recently been depleted. You may have been using the benefits of investment via income drawdown to provide for a large expense, such as a new car or to fund a round the world cruise. Once that objective has been met, you may find yourself with a smaller fund for the rest of your retirement, but also less of a need to continue investing for a specific reason.
 
“While the above reasons are some of the most common reasons why retirees may decide to annuitise, the fact is that everyone’s circumstances are unique to them. Therefore it is essential you seek personal financial advice to help you understand your goals and aspirations, as well as your financial fears and attitude to risk. Don’t forget you do not have to buy an annuity with all your pension funds at the same time – you can decide to phase the annuitisation of your investments over a period of years, if required.”