There are certain important issues to consider when you start thinking about buying an annuity. One of the main ones is whether your lifestyle or your health can boost your retirement income? If you have had an illness, which could be serious, or mild, or if you are a smoker, for example, you could see an increase to your income.
In such scenarios you could qualify for an impaired life annuity or an enhanced annuity, both of which offer increased annuity rates on the basis that your life is likely to be shorter than the average. Where once you had to be seriously ill to qualify, you can now qualify for such annuities on everyday grounds such as high or low blood pressure or high cholesterol.
Never mind annuities for ill health or lifestyles, what about where you live? You can now consider a policy priced to your postcode. If you live in a less affluent area where statistically speaking you’re more likely to have had a manual job, this could enhance your annuity income by around 5%. Legal & General, Norwich Union and Prudential offer such enhancements if you live in an area such as around Glasgow, where life expectancy is actually lower than normal.
Naturally, there are alternatives to an annuity, other retirement options. Those retirees with larger pension funds can take out unsecured pensions (USPs), formerly known as income drawdown arrangements, which give a regular income whilst leaving the pension fund invested. You maintain your pension fund rather than giving it to an insurance company (as you would to buy an annuity), and take the tax-free cash and an income from it, but there are no guarantees with these. Your fund can be passed on to beneficiaries if you die prematurely, subject to a 35% tax charge. Specialist advice should be taken as USPs are relatively high-risk and are generally not recommended for those with pension pots under £100,000, with, perhaps, other assets as well.
There are lots of new products arriving on the market thick and fast. For example, we now have variable annuities, also known as “third way” pensions, which aim to give the best of traditional annuities (a guaranteed income) and income drawdown (for potential investment growth), and are offered by only a handful of providers.
What about annuity deferment? As annuity rates fall, is it worth delaying biting the bullet? Many retirees will be asking this question, but in the economic climate we are witnessing there is no easy answer. The Bank of England’s move to pump £75bn into the economy through “quantitative easing” has pushed up gilt prices and, in turn, brought gilt yields down to 50-year lows. It is these gilt yields that are used to price annuities, prompting rates to fall by 10% from their recent peak last July.
Unfortunately, gilt yields will not increase in the short term, so it’s unlikely that annuity rates will change that much either. What we have to consider is whether pension fund values will pick up, but we don’t really know when we’ll get a bounce in the market. If you can afford to delay buying your pension annuity, then it’s probably worth doing so, as at some point in the future the value of your pension fund should pick up.
However, if your pension fund has been protected from the current effects of market volatility by automatically shifting into bonds and cash as you approach retirement you should get on with it and buy an annuity as rates are still relatively high, and annuity quotes remain competitive.
If you choose to delay buying an annuity simply in the hope that annuity rates will rise, you could be in for a bit of a shock. Rate improvements in the longer term are most unlikely because we’re living longer, so annuity providers have to pay out more. And for each month you delay buying your pension annuity, you’ll naturally lose a month’s worth of income from it. You also risk annuity rates falling even further while you wait.
