Alternatives to buying an annuity in retirement

Tuesday, October 9, 2012

Alternatives to buying an annuity in retirement



With annuity rates falling to the lowest levels on record, many over 50’s are now looking at what other alternative options are available to them. To puts things into financial perspective, a man at 65 with a larger than average pension fund of £100,000 cannot hope to achieve an income above £6,000 per year buying a standard annuity. With life annuities providing such a low level of return many will now start thinking about how else they can invest their pension fund in order to secure an income in retirement. Here we have outlined the main alternatives to retirement annuities.


Drawdown

Taking a drawdown plan means that your pension pot stays invested from which you can then draw an annual income, subject to the limits imposed by HMRC. Rather than investing their pension into bonds (as is the case with an annuity) drawdown customers instead invest their money into equities. However equities are seen as a higher risk compared with bonds which tend to be a more stable and secure investment. The trade off is that the returns on offer from equities are much greater which means they provide the opportunity for an individual to increase their income in the future.  

Another key difference with drawdown is that the income is not guaranteed for life, as is the case when buying an annuity. If investments perform badly your income level could fall. Moreover, you could run out of money in the future as you do not know in advance how long your retirement will be. Finally the amount you can take out of your fund each year is restricted by the GAD rate which is short for the Government Actuary Department. The GAD rate is tied to annuity rates, which means if they fall, the maximum amount you can withdraw will also fall.

Fixed-Term Products

A fixed term annuity is an annuity that is offered over a pre-determined time period, normally between 3 and 15 years.  It allows individuals to take advantage of any potential changes to their health or personal circumstances in the future. Some of the changes that may occur include an improvement in rates, a change to one’s health, inheriting money or getting a divorce.

With a lifetime annuity you cannot adapt your income to these changes because you are locked into your product for life. However, with a fixed term annuity you can opt out of your product either at the end of the term or in some cases during the term, using a conversion feature. In this respect, they provide a great deal more flexibility than a standard annuity which cannot be altered at any point. However there are some drawbacks to choosing a fixed term annuity. For example, if rates were to fall then you would be worse off when you do come to buy a life annuity in the future.

Deferment

If these two options do not appeal then the only choice to avoid low rates maybe to carry on working and retire later. This will allow you to build up a bigger pot so that when you do buy an annuity, you will have more money and maybe able to benefit from any improvement in rates. In fact just by retiring later you may be offered a better rate as older retirees are calculated to live for a shorter period compared to younger retirees. You can also take an annuity and carry on working on a part -time basis, which will help to supplement your income.

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This article was provided by the content team at 123AnnuityRates where you can read more about annuities and pensions.

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