According to recent research, pension annuities collapsed to an all-time low earlier this month, and this led some people to question whether taking out this ‘income for life’ is a worthless exercise.
The study found that people on the cusp of retiring this year are in a quandary, as income rates have plummeted to a 25-year low, and while many might be drawn to the idea of an annuity as it will provide them with a fixed income for life, they cannot undo the contract once it’s signed.
Rates have been falling all year, to the extent that a 65-year-old who converted a £100,000 pension pot into an annuity this month would receive £721 a year less than if they had made the same decision in January.
There have been several ongoing factors contributing to the fall in the rates, including concerns over Brexit, trade wars and a global economic slowdown, so anyone approaching retirement needs to choose their options carefully.
As one of the study’s authors underlined, plummeting annuity rates are piling misery on soon-to-be retirees. It has been “a horror story”, and a lot of people are uncertain about the stock market, which is likely to affect them throughout their retirement.
One alternative to annuities is to take only the income produced by the investments held in their pensions, such as from shares, funds or investment trusts. However, retirees should bear in mind that share prices can be volatile, and dividends can be cut or even scrapped.
People purchasing annuities are advised to shop around to get the best rate, as an incredible £1 billion in pension income is thrown away each year by people not making comparisons.
Andrew Hennah, Financial Planning Director at Milsted Langdon, said: “The research suggests that annuity rates are at their lowest ebb, leaving many questions for individuals that are planning for retirement.
“If you’re unsure about retirement planning and the options that are available to you, it is important that you seek specialist advice to ensure you make the correct decision for you.”