Pension annuities make staggering ‘comeback’

Martin Lewis compares pension annuity against drawdown

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Britons will be weighing up various options for their retirement, and many will be hoping to have the most cash possible at their disposal. One choice which is making a resurgence is the annuity – which provides a regular guaranteed income in retirement.

People can buy an annuity with all or some of their pension pot, but they are likely to get more for their money in the current climate.

According to Canada Life, a 30-year guarantee would now pay £59,940 additional income compared to rates at the beginning of the year, on a £100,000 initial purchase price. 

The provider states its average benchmark annuity rates are up by 44 percent since January 2022 as the favourability of the option has increased. 

Nick Flynn, Retirement Income Director, Canada Life, said: “Annuities have made quite a comeback this year, with guaranteed lifetime income back in vogue following the strong improvement in rates. 

“This has largely been driven by the positive shift in yields available on gilts.

“Competitors have also vied for market position.

“Annuities can play a vital role in any holistic retirement plan and yet many preconceptions continue to reinforce the misunderstanding around annuities. 

“From the positives of longer guarantee periods, to 100 percent value protection, or the benefits of disclosure providing enhanced rates, annuities are worth more than a cursory second glance.”

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There are pros and cons to bear in mind when it comes to annuities which should be carefully considered by those weighing up their options.

Many people choose annuities as they offer 100 percent secure lifetime income, which isn’t linked to the stock market.

However, it does mean income is fixed and offers no flexibility.

That is unless a person opts for some form of inflation-linked escalation, which can be expensive.

Someone in good health could see the rate they are offered significantly improve. 

As a result, people are always encouraged to disclose their health and lifestyle to their adviser, annuity broker or annuity provider.

But if a person dies “early”, their estate may not get their money back, unless a person has the right protection in place. 

People may wish to combine annuities and drawdown options to create an outcome suitable for them, as it does not have to be an “either/or” decision.

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But Mr Flynn stressed people should never just accept the offer from their existing pension provider.

Instead, they should always shop around the market to find the best rate for their circumstances. 

The expert concluded: “For clients seeking income security in retirement, annuities can play a key role in retirement planning. 

“It will always pay to shop around for not only the best rate, but also the right shape and type of annuity. 

“Purchasing an annuity is a significant financial step and it is the role of advisers to help their clients understand the choices available and select the right annuity for a customers’ individual needs.”

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