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Annuity alternatives

Annuities are under fire from everybody at the moment. Rates have recovered slightly, but are still at historically low levels. This means that the average annuitant has to survive for many years before they feel like they have had good value from their accumulated pension pot.

So what are the alternatives to buying an annuity with your pension fund?

Delay until annuity rates improve. You can delay your annuity purchase until interest rates start to rise again. This is likely to lead to an increase in annuity rates (although this is not certain). If you delay your annuity purchase and your health deteriorates, it could mean that you benefit from a better rate via a medically enhanced annuity rate (again, not guaranteed).
Downside - annuity rates are not guaranteed to go up in the future. If they do increase, the likelihood is that they will increase by a relatively small percentage rather than doubling or trebling. While you delay your annuity purchase, you are missing out on the annuity income you could have had. It can then take several years for you to get back this ‘lost’ income. Your pension fund value could also fall during the deferral period (depending on investment performance)

Delay indefinitely. There is no longer a requirement to buy an annuity with your pension pot at age 75. You can defer your annuity purchase indefinitely. If you die before age 75, the accumulated pension pot would be paid to your nominated beneficiary free of tax.
Downside - if you die after age 75 with a pension fund still intact, a 55% tax charge would be applied to your pension pot before it is paid out to your estate. Again, your pension fund value could fall while you were deferring. While you defer your annuity, you are missing out on income you could have had.

Buy a fixed term annuity. Fixed term annuities provide a guaranteed level of income for a predetermined number of years. At the end of that term, they then provide a guaranteed maturity amount which can be used to buy another fixed term annuity, or a lifetime annuity.
You delay the decision of locking into an annuity, and of choosing annuity options like a spouse’s pension or escalation. If annuity rates rise in the future, or your health deteriorates and you qualify for an enhancement, you could end up better off. It works like a drawdown plan but with some certainty about your future income and investment returns.
Downside - the guaranteed maturity amounts can be quite low, and income levels are not much different than a standard annuity. You are not guaranteed to end up with a higher annuity rate in the future. Charges are higher than on a standard annuity, which impacts on returns.

Start to draw income from your pension fund. ‘Capped Drawdown’ is an option that allows you to draw tax-free cash and / or income from your pension fund (within limits) without buying an annuity. This allows you more flexibility in the future and would let you benefit from any future increases in annuity rates.
Downside - setup charges and ongoing policy charges are generally higher than with an annuity. If your pension fund’s investments do not grow enough to replace the income withdrawn, it can lead to lower levels of income in the future. It is generally seen as a higher risk option that needs ongoing advice and maintenance.

So what should I do?

Everybody’s circumstances are different.
If you want advice, please call and speak to our qualified independent adviser Gary Lee on 01625 427522.


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