Insurance companies and pension advisors are keen to push retirees towards buying an annuity with their pension pots. This is not that surprising given the commissions advisors receive and the huge profit annuities generate for the insurance industry. Standard Life for example makes 18.6% each year on retirees pension annuities. The other providers are not telling!
Only those who live to a ripe old age (beyond 85) are likely to benefit from buying an annuity when they retire. At that age, realistically what will you be spending your money on?
Reason why annuities are not such a good idea
1) Annuity rates have fallen by 20-30% since 2010. Buying now, or in the near future will mean you are getting up to a third less for life, than you could have got in 2010. On a £100,000 pension pot that is around £2,908 a year – a massive £58,160 over 20 years!
2) Once you have bought an annuity that’s it, you cannot change it or access the money.
3) When you die your pension pot goes to the insurance company, not your heirs. Unless guaranteed for a certain minimum number of years, annuity payments will stop.
4) Annuities are poor value.
Someone buying an annuity at 65 would need to live to 82 (17 years) just to get their money back in nominal terms, that’s not allowing for inflation, or the investment returns the insurance company will be making on your pension pot. For example: a 65 year-old male non-smoker in good health would get just £5,816 with a £100,000 pension pot at today’s rates.
It is even worse if you opt to “index link” your annuity to the RPI “to safeguard against the effects of inflation.” Our 65 year-old man would receive just £3,370 per annum now. With most providers it will take around 16 years just to ‘catch up’ with the initially higher, level annuity rate, our 65 year-old would be 81 before any he receives any additional financial benefit from an index linked annuity.
Income Drawdown
For many, income drawdown is a much better option. The same £100,000 fund would provide annual payments of £6,960. Even if there were no income at all, which is unlikely, it would take 14 years to deplete the pension pot completely. If you die in the meantime, any remaining pension pot is transferred to your estate, not an insurance company.
Always take the 25% tax-free lump sum. There are moves to limit this to £36,000 and it may even be withdrawn altogether in the future.
It important that people get proper independent financial advice before making a decision and especially before committing their pension pot forever by buying an annuity.
