Annuities are comfortably playing an important role in retirement planning again, with rates continuing to provide a high level of income.
I do think they have reached a plateau for now. Although I expect annuity rates to remain near current levels for the time being, I don’t envisage any further significant rises unless bond yields increase again.
The recent decision by the Bank of England to kept interest rates on hold suggests we may be at the peak of this interest rate cycle.
Standard Life re-entering the annuity market is good news as it will increase competition and provide more capacity. Providers were caught out by the surge in annuity rates and struggled to cope with the increased demand, so another should help improve service standards.
London and Colonial’s New Open Annuity allows funds to be transferred to beneficiaries without any tax payable
On the other side of the retirement coin, it can be argued drawdown is becoming more challenging as markets remain in the doldrums. That said, it seems the advantages of income flexibility, control and option to leave money to the family outweigh concerns about challenging investment conditions.
Traditional drawdown and annuity options are the two most popular ways to convert pension pots into income but it is a mistake to think it is a black and white choice.
The holy grail of retirement income innovation has been to produce something that combines the benefits of a guaranteed income for life with the advantages of drawdown, but despite many noble attempts such as ‘unit-linked guarantees’, otherwise called flexible annuities, nobody has cracked this nut.
Annuities are a hard act to beat for those who want to maximise their pension income with peace of mind and security
Fixed-term annuities (which are not really annuities but a subset of drawdown) provide a good way of arranging a guaranteed income for a set term – for example, five years – while maintaining flexibility and control.
But what options are there for retirees who want to have their cake and eat it?
The most obvious choice is a combination of annuities and drawdown. This can be done by simply using funds in drawdown to arrange annuities on a regular or ad hoc basis.
Phased drawdown used to be popular, which involved converting slices of a pension fund into tax-free cash and annuities. This is still the most tax-efficient way to take income because a significant portion of that income is tax free. However, this option only works where the whole tax-free cash is not required at the outset.
The holy grail of innovation has been to produce something that combines guaranteed income for life with the advantages of drawdown
Canada Life’s Retirement Account allows for a combination of drawdown and annuities under one plan. There are a number of advantages of this plan compared to arranging annuities separately. Apart from the convenience of having everything in one place, the annuity income can be paid into the pension bank account which gives added flexibility.
Just has an innovative product called Secure Lifetime Income (SLI), which is essentially a platform-based annuity. It means those with pensions on 7IM or Novia platforms can arrange an annuity which sits within the Sipp alongside the pension investments, so everything is under one roof.
One of the arguments for SLI is to think of it as a similar asset class to bonds, replacing some already in the investment portfolio.
Although I expect annuity rates to remain near current levels for the time being, I don’t envisage any further significant rises
Finally, London and Colonial’s New Open Annuity allows clients to have an annuity type income and then, on death, funds can be transferred to beneficiaries without any tax payable, even if death is after age 75.
Annuities are a hard act to beat for those who want to maximise their pension income with peace of mind and security. But those who don’t like them because of their limited flexibility and lump sum availability for family after death can consider a combination of annuities and drawdown or one of the alternative annuity options.
William Burrows is an adviser with Eadon & Co and runs the Retirement Project at www.williamburrows.com
How about an article on temporary annuities Billy?
Tax Free??!! London & Colonial’s KFD says otherwise Billy: “Where you die aged 75, or older, then the annuity protection lump sum will be subject to tax at 45% and any nominated second life or Beneficiary’s income payments will be subject to income tax at the marginal rate of the recipient.”