Should I consider annuity purchase?
Since the global financial crisis in 2007/08 and the introduction of pension freedoms in 2015, the use of traditional pension annuities, where savers purchase a regular income for life, has been steadily on the decline.
With falling annuity rates, attractive returns on equity-based investments and the ability to access pension savings flexibly, we saw a dramatic shift towards the use of what is currently called FAD (flexi-access drawdown). This enabled savers to draw on their retirement funds in a variety of ways, such as only taking the income they needed, while keeping the balance of their funds invested with the objective of achieving further growth and inheritability of the fund by their family.
This trend looked set to continue but an unprecedented series of events this year has led us to reassess the utility of the pension annuity. From the invasion of Ukraine to the recent mini-budget, annuity rates have increased substantially and returns from equity-based investments have been volatile at best. While the appointment of Rishi Sunak as prime minister has had a calming effect on government bond yields that affect annuity pricing, it is likely that annuity rates will remain higher than they have for the past ten years.
Therefore, based on current annuity rates available, there is a case to be made that if a client is approaching the age of 70, or earlier if they suffer from a health condition, consideration should be given to securing an annuity with at least some of their funds.
This is not to say that it would be suitable for every client as there are still a number of factors to consider including:
- Annuities require the commitment of capital, generally speaking the amount used to purchase the annuity is lost on death.
- If you do want to build in any death benefits this will reduce the annuity rate payable.
- Given current volatility you would likely be selling your pension savings at a low value to purchase an annuity.
- Annuities require you to make decisions up front, once it is in force you are committed to the terms that were agreed.
At our upcoming reviews, we will be discussing with you the worth of securing a guaranteed income to meet some of your income needs, particularly your basic costs of living and whether this is suitable for you.
Wendy is a Chartered Financial planner with over 30 years experience and is a founding director of Colmore Partners.