Annuities – Fixed-term plans can offer the flexibility of drawdown

Martin Lewis compares pension annuity against drawdown

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An annuity is a product that turns an individual’s pension savings into an income for life, and there are predictions that many more people will now be looking at using some of their retirement cash to buy one. New figures show annuity rates have leapt by 44 percent in the space of a year and are now at their highest levels since early 2009.

Data from Hargreaves Lansdown’s annuity quote service shows a 65-year-old with £100,000 able to get an annuity income of £7,532 per year. This is a whopping 45 percent increase on the £5,208 best-buy income from October 2021.

An interest rate hike this week could further stimulate the market and annuity incomes could be on the rise again.

On his YouTube channel, financial planner Chris Bourne explained how people can take advantage of the rise in rates and get the guaranteed income of a pension annuity without losing the flexible access and death benefits of drawdown.

He stated that there a “great possibilities,” for people who opt for fixed-term annuities that can give the best of both worlds.

Fixed-term annuities allow people to get a guaranteed income for a certain time period between three and 25 years, without having to tie someone into the same annuity rate for the rest of their lives.

He explained that they allow people to choose a guaranteed maturity value at the end of the fixed term which allows them to re-purchase the fixed-term plan or a lifetime plan, take it as a lump sum payment, or transfer it to another pension scheme ie go back into drawdown.

Mr Bourne said: “What this means is you can access all the security of an annuity for a period of time.

“You can know for certain how much money you can get on a certain basis, what amount of money it’s going to be worth at the end, and you don’t have to lose control of your benefits.

“For me, the major benefit of this is that you’re not locked into an annuity rate forever.

“You don’t benefit from any rate rises after you purchase a lifetime annuity but you still can with a fixed term annuity, because you’re able to renew when it matures.”

Annuity rates usually improve with age, however people’s health is unpredictable. If something happens, it’s not guaranteed people will receive compensation to help them cope with their illness.

Choosing death benefits with a lifetime annuity is “a lottery,” as people never know who will live the longest.

However taking out a fixed term annuity gives people that flexibility back, he said.

Mr Bourne explained that Legal & General offers examples in their key features document showing how much people can take out of their fixed-term annuity.

Britons can take lump sums from the fixed-term annuity without it affecting their monthly income. They are just deducted from the final maturity value.

Annuities have declined in popularity since Freedom and Choice but with rate rises, people may want to reconsider this option if there is a need for some element of guaranteed income in retirement.

Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown said: “After months of rising yields annuity rates have cooled slightly in recent days.

“The appointment of Rishi Sunak as prime minister has brought an element of calm following the bond market meltdown triggered by the Truss government’s mini-budget.

“The announcement caused chaos for investors but proved a boon for annuities as surging gilt yields pushed incomes ever higher.

“The revival in incomes could prompt people currently in income drawdown to take a closer look at what annuities can offer but it’s important to use a service that looks industry-wide to get the best quotes.

“Annuity providers will usually guarantee their quotes for a certain period so even if annuity rates move down you may well still qualify for the higher income – it’s worth checking guarantee periods when you get a quote.”

More videos are availavble on the Chris Bourne – Tax Free Investing Expert Youtube channel.

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