When George Osborne announced the introduction of pension freedoms, it was one of the biggest changes ever to the pensions system in the UK. Previously, savers had very little choice of what they could do with their pension pot and were forced to choose an annuity that would give them a guaranteed income for life. Now however, people can do almost what they like with their pension pot. They can withdraw all their money for example and invest it elsewhere, or even spend some of it on the holiday of a lifetime. They can also still buy an annuity, but some people are predicting that fewer and fewer people will choose to do this.
Why do annuities have a bad reputation?
Annuities are actually unfairly maligned and are unpopular for three main reasons:
- Rates: For the last few years rates have been awful. Some poorer annuities could see a £100,000 pension pot getting as little as £5,500 per year.
- Choice: Many people were (and still are) unaware that they can shop around for an annuity. Most people have traditionally got poor deals because they didn't shop around and simply remained with their provider, being locked into a poor deal for life.
- Value: With some simple annuities, on death, survivors get nothing. This obviously makes these types of annuities poor value if you die soon after retirement and has contributed to the poor reputation of annuities.
Annuities aren't all bad
Despite these three reasons and why many people don't like annuities, they are actually a good concept for many people. Depending on their circumstances and assuming they shop around and get a good deal, then there is a lot to be said for having the security of knowing how much you will receive every year for the rest of your life, guaranteed.
With other investments, it is difficult to plan for longevity. If a person simply decides to live off their savings then there is the very real risk that if they live longer than they expected, they could run out of money. This is obviously a concern at this stage of life when a person may be using their savings to pay for care fees or other essential living spending. With an annuity however, it provides a hedge against longevity, and this means that those with one can plan clearly for retirement and be assured they will have an index linked guaranteed payment every month until they die.