How to get the most out of your annuity
Thanks to the compulsory annuity system operating in the UK, a good retirement here is about little more than timing. But there are a few ways to maximise your annuity income...
Thanks to the compulsory annuity system operating in the UK, a good retirement here is about little more than timing. The idea behind buying an annuity is to insure that you get a guaranteed income for the rest of your life, but when you buy it makes a big difference to the income you get.
Rates have taken a nosedive in the past few weeks, for example, with most of the leading life assurers making big cuts, says Sharlene Goff in the FT. At the beginning of November, a 70-year-old man with a £100,000 pension pot would have been able to secure an annuity income of £8,138 if he'd made his deal with Norwich Union. He could now get a mere £7,944. Over all, annuity rates have fallen almost two-thirds since 1990. So what's going on?
The blame for the cuts can be put at the door of the fall in yields from gilts, which determine annuity rates, says Anne Ashworth in The Times. At the moment, pension funds desperate to ensure that they are able to meet their long-term liabilities (which are ballooning thanks to long-living pensioners) are frenzied purchasers of gilts, but their demand pushes up gilt prices which pushes down yields and hence annuity rates.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
So is there anything you can do to improve your own annuity income? There are several things to consider before you buy an annuity. For starters, note that you don't necessarily have to buy your annuity from your pension company. Scour the market for the best annuity rate and check out the rate tables on the Financial Services Authority's website (www.fsa.gov.uk).
There are various types of annuity. A single life annuity (which won't pay your spouse after your death) pays out more than a joint life annuity (which will), but it's not much use if you need to provide an income for your spouse. You also get a higher initial income from a level annuity than an escalating annuity, but the former does not keep pace with inflation and the latter does.
However, on the plus side, if you have a health problem or smoke, you should buy an impaired life annuity, which would increase your income by up to 40%. It's also worth noting that you don't have to buy an annuity until you are 75, so you might decide to delay in the hope that rates will rise (this is clearly a gamble, but many think bond prices will soon fall and yields rise, so it might not be a bad call).
If you don't want to wait until you are 75, you might at least want to wait until April, when pension changes come into force. You will then be able to buy an annuity that lasts for a limited term of say five or ten years, or to opt for a value protected annuity: this means that if by your death the total gross income you have received has not exceeded the cost of buying the annuity, your heirs will receive the difference in cash, subject to a 35% tax charge.
Sign up to Money Morning
Our team, led by award winning editors, is dedicated to delivering you the top news, analysis, and guides to help you manage your money, grow your investments and build wealth.
Emily has worked as a journalist for more than thirty years and was formerly Assistant Editor of MoneyWeek, which she helped launch in 2000. Prior to this, she was Deputy Features Editor of The Times and a Commissioning Editor for The Independent on Sunday and The Daily Telegraph. She has written for most of the national newspapers including The Times, the Daily and Sunday Telegraph, The Evening Standard and The Daily Mail, She interviewed celebrities weekly for The Sunday Telegraph and wrote a regular column for The Evening Standard. As Political Editor of MoneyWeek, Emily has covered subjects from Brexit to the Gaza war.
Aside from her writing, Emily trained as Nutritional Therapist following her son's diagnosis with Type 1 diabetes in 2011 and now works as a practitioner for Nature Doc, offering one-to-one consultations and running workshops in Oxfordshire.
-
Do you qualify for the Winter Fuel Payment if you live abroad?
The Winter Fuel Payment will be means tested for expats living in Europe, in line with the new rules impacting those in the UK. But a quirk in the system means not all countries are eligible.
By Katie Williams Published
-
What the Employment Rights Bill means for your job
New workplace reforms are set to give employees new rights to benefits and flexible working
By Marc Shoffman Published