All about Annuities
With the new drawdown rules however, the focus has shifted from the inflexibility of annuities to the freedoms enabled by the new rules. The attractiveness of annuities, or lack of, has not been helped by the historically low levels of annuity income you will currently receive from your pension pot, and which of course you will be stuck with for the rest of your life. Whilst there is some indication that annuity rates will rise by a couple of percent as the economy continues to recover they are unlikely to return to the high levels of the early 1990s when a pension fund of £100,000 would have guaranteed an income of £15,640 a year for life. In May 2015 it would have provided less than £6,000!
Legal & General expect the UK annuity market to shrink in size from £12 billion to £2.8 billion following the introduction of the new pension rules, but this could also see providers developing more flexible and appropriate annuity products in the future for people considering flexible drawdown. After all, annuities may still have a part to play in your investment approach. If you’ve read the section about your new options for managing your pension you will have seen two options for employing an annuity:
Mix and Match
This option entails splitting your pot in two to create an annuity that wil provide a regular and guaranteed income to cover your normal day to day living expenses in retirement, and a second pot which you could keep invested and which would hopefully deliver some capital growth.
Drawdown then Annuity
In this option you choose to put all your pot into drawdown initially, where you manage it until such time as it becomes too much for you, or you no longer want to dedicate the time to managing it. You then buy an annuity with the remaining pot. As you will be older, the income will be paid for a shorter period of time and so the income level will be higher. If by then you have acquired some age related medical issues you should also be able to secure an enhanced annuity rate, or what the providers call an impaired life annuity.
Annuity Buy-Back (updated 8th July 2015)
If you are already retired and are in receipt of an annuity you have the option of continuing with the annuity or potentially exchanging it for a lump sum under the Government’s proposals brought forward after the budget. This option is potentially attractive for those who may feel hard done by, having bought an annuity when the rates have been historically low. I say potentially because this option has yet to be fully explained and the concept has been out for consultation with the pensions industry. Partly as a result of that consultation the Government announced in the July budget that it would be delaying implementation of the secondary annuity market until 2017 from 2016 due to concern about the impact on savers. Watch this space for an update that has been promised for Autumn 2015. As the results of the consultation become clear I will update the post and include information in our regular Newsletter, which you can sign up at the bottom of the Blog.