‘Still a rip-off” – pensioners snub annuities despite £1,000 income hike. ‘Drawdown best’
Retirement expert advises people to learn about state pensions
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Rising interest rates have driven up the returns on annuities, and providers say demand is starting to recover after years in the doldrums. Yet long-standing suspicions remain.
Annuities fell out of favour after the Government abolished the obligation to buy one at retirement in April 2015.
The over 55s are now free to take cash from their pension instead. Most leave their money invested via drawdown to continue growing, and draw money as required.
Now rising interest rates have driven up annuity rates while volatile stock markets have increased drawdown risks.
The balance is shifting towards annuities but Express.co.uk readers remain wary. DSM voiced suspicions shared by many: “ Annuities are still a rip off. The providers are the ones profiting.”
Reader DodgyEU said: “Annuities are toast. So glad they got shot of them.”
DodgyEU pointed out that those in poor health with a low health expectancy risk getting a low return if they die shortly after taking out their annuity plan.
Getting £1,000 a year more won’t make much difference in that scenario, he said.
Another reader, EllieB, noted that rising annuity rates will not help millions of pensioners who have already locked into a lifetime income. “This benefits them in no way whatsoever.”
An annuity is the income for life you buy with your pension at retirement, that pays a guaranteed income for as long as you live.
People gave upon them because they are restrictive, because once you have taken one out you cannot change or amend it. Also, if you die shortly afterwards, the annuity income dies with you (unless you took out a joint life annuity with your partner).
Frustration turn to fury when annuity rates collapsed in the aftermath financial crisis, so that a 65-year-old with £100,000 of pension might get level annuity income of just £4,500 or so a year, even less if they wanted it to grow with inflation.
Sales collapsed and annuity providers abandoned the market, leaving only Aviva, Canada Life, Just Group, L&G and Scottish Widows.
Many retirees prefer to pocket their 25 percent tax-free cash then leave the rest of their pension invested via drawdown.
That way their savings continue to benefit from share price growth, for the remaining 20 or so years of their retirement. The downside is that drawdown also exposes them to stock market volatility, and a potential pension-crushing crash.
It is a risk many are willing to take. Almost 600,000 over-55s make flexible pension withdrawals via drawdown every year, which is 10 times the number buying annuities.
Even rising annuity rates aren’t changing that.
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The Bank of England has now increased interest rates three times, and this has pushed up annuity rates.
Today, a single man aged 65 with £100,000 can get level annuity income of £5,454 a year, almost £1,000 more than after the financial crisis, according to Hargreaves Lansdown.
If interest rates continue to climb, so will annuity rates, said Andrew Tully, technical director at Canada Life.
As ever with financial planning, the decision will come down to your personal circumstances, and attitude to risk.
It all may also depend on whether you have children – funds in drawdown can be passed on when you die, annuity income cannot.
Alternatively, there is a halfway house, Tully said. “You could some most of your pension invested via drawdown, allowing it to grow, but use a chunk to buy an annuity to give you a secure lifetime income.”
That could give pensioners the best of both worlds: flexibility and security.
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