Annuities.
Anyone remember these? Over the last decade, we did not hear a lot about them. But if one had a conversation about exchanging a lump sum of money for a guaranteed income, they would hear sentences like ‘annuity rates are poor’ or ‘annuities available on the market do not offer value for money’. And rightly so.
The low-interest environment we have enjoyed or endured (depending on your borrowing or savings requirements) over the last ten years meant pensioners had to have a lot of capital to exchange to receive any substantial income. For example, in 2015, a 65-year-old saver would have received £5,454 a year in exchange for their £100,000 nest egg on a single life annuity. But this month, the highest annuity available on the market for the same amount would pay £7,420 a year. That is some difference.
So despite the gloom, doom, and turbulence we have had this year, pensioners looking for stable and predictable income might want to consider giving annuities a second look.
Not only have the rates changed, but also pension providers are more innovative than ever. In addition to a single life, joint life, enhanced and escalating annuities, you can also opt for short-term annuities.
For these fixed-term annuities, you could use part of your pension pot to buy an annuity that provides a short-term income for five to ten years. At the end of the term, you will receive your lump sum back (or what’s left of it). You can then use it to buy another income or move your pension to a flexible drawdown. The maturity values are often guaranteed at the outset, offering additional comfort.
One of the leading UK pension providers, LV, has recently shared a few examples of what clients could expect:
- A 57 year old client with £250,000 looking to achieve 4% income per annum (£10,000) over ten years (until SPA) can expect to achieve a Guaranteed Maturity Value of £269,121*
- A 65 year old client wanting to erode their fund of £125,000 could achieve an income of £15,719 per annum over the course of 10 years*
- A 60 year old client looking to secure £500,000 of capital with no income for five years can expect to achieve a Guaranteed Maturity Value of £648,376*
*As at November 12th, 2022
Clearly, these are interesting options. They will not be suitable for everyone, but for those looking for certainty, they are worth considering.
If you would like to have a straightforward conversation about your pension options, please get in touch
01733 314553 info@brookswealth.co.uk www.brookswealth.co.uk
This article was written by Michal Zin, IFA at Brooks Wealth