Thanks to the introduction of Pension Freedoms in 2015, there are now a few different ways that you can choose to withdraw your retirement savings.
One of those options is to purchase an annuity that could provide a guaranteed annual income for life. But new research reported by Professional Adviser has discovered millions of over-50s could be overlooking them because of misconceptions.
Using your pension savings to purchase an annuity can bring a range of benefits, but it’s not suitable for everyone. Read on to discover the truth behind four common misconceptions to learn more about them.
1. “An annuity is inflexible”
While it’s true that you can’t usually amend your annuity after you’ve bought it, there are lots of different options available. For example, an annuity can be index-linked, so that the payout rises each year in line with inflation, and it can be fixed for a certain number of years or for your lifetime.
By working with a financial planner, you can see the vast range of available options. This can enable you to make a more informed decision about whether an annuity is right for you. If the answer is yes, they can also help you to choose the product that best suits your needs.
2. “If I die earlier than expected, my beneficiaries can’t inherit my annuity”
What happens to your annuity after you die depends on a variety of factors.
One of those is the guarantee period that you can choose when you take out the annuity. You can choose to guarantee your annuity for a certain period of time. If you die within that time frame, your beneficiary can inherit the remainder of your payments, so they won’t be lost.
You can also choose a single-life or joint-life annuity. A single-life annuity means that you are the only person who can benefit from your annuity, so payments will stop after you die. But if you take out a joint-life annuity, then in the event of your death, your beneficiary will continue to receive a proportion of your payouts.
If this is something that is of particular concern to you, it’s important to consult your financial planner. They can help you to take the most suitable steps to ensure you have enough retirement income for today, while also ensuring your beneficiaries can inherit from you when the time comes.
3. “If the provider goes bust, I could lose my money”
It’s natural to want to be sure that your retirement savings are safe. So, you’ll be pleased to learn that if you do buy an annuity, your money is protected by the Financial Services Compensation Scheme (FSCS).
You may have heard of the FSCS in relation to cash savings, but it also protects your retirement savings. Whether you’ve kept your savings in your pension fund or if you’ve bought an annuity, if your provider goes bust the FSCS protects 100% of the balance.
4. “An annuity isn’t good value for money”
Whether or not you consider something to be good value for money partly depends on your circumstances and values. For example, if you value having a guaranteed annual income without having to worry about running out of money, the concept of an annuity might seem worthwhile.
If you are focusing purely on financial value, annuity rates have increased significantly over the past year. According to a report from MoneyWeek, as of 30 May 2023, a 65-year-old with a £100,000 pension pot could buy an annuity that pays out up to £7,144 a year. This is a 20% increase from the best available rate in May 2022.
Moreover, FTAdviser reports that the break-even point for annuities has reduced by five years. A 65-year-old with a £100,000 annuity that pays out £6,907 would make their money back in approximately 14.5 years. The same annuity five years ago paying £5,240 a year would have had a break-even point of 19 years.
So, the rise in annuity rates in recent months means that annuities now offer greater value for money than they have for some time. This could be a helpful option if you’re keen to have the security of a guaranteed annual income.
A financial planner can help you decide if an annuity is right for you
With so many factors to consider, it can be overwhelming to decide how to take your retirement income. It’s sensible to consult with a financial planner who can advise you of the most sensible option for your circumstances.
To learn more about how we can help you plan for your retirement, please get in touch by emailing us at financial@barwells-wealth.co.uk or by phone on 01273 086 311.
Please note
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future results.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts.
This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
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