With
annuity rates falling to the lowest levels on record, many over 50’s are now looking at what other alternative options are available to them. To puts things
into financial perspective, a man at 65 with a larger than average pension fund
of £100,000 cannot hope to achieve an income above £6,000 per year buying a
standard annuity. With life annuities providing such a low level of return many
will now start thinking about how else they can invest their pension fund in
order to secure an income in retirement. Here we have outlined the main
alternatives to retirement annuities.
Drawdown
Taking
a drawdown plan means that your pension pot stays invested from which you can
then draw an annual income, subject to the limits imposed by HMRC. Rather than
investing their pension into bonds (as is the case with an annuity) drawdown
customers instead invest their money into equities. However equities are seen
as a higher risk compared with bonds which tend to be a more stable and secure
investment. The trade off is that the returns on offer from equities are much
greater which means they provide the opportunity for an individual to increase
their income in the future.
Another
key difference with drawdown is that the income is not guaranteed for life, as
is the case when buying an annuity. If investments perform badly your income
level could fall. Moreover, you could run out of money in the future as you do
not know in advance how long your retirement will be. Finally the amount you
can take out of your fund each year is restricted by the GAD rate which is
short for the Government Actuary Department. The GAD rate is tied to annuity
rates, which means if they fall, the maximum amount you can withdraw will also
fall.
Fixed-Term
Products
A
fixed term annuity is an annuity that is offered over a pre-determined time
period, normally between 3 and 15 years. It allows individuals to take
advantage of any potential changes to their health or personal circumstances in
the future. Some of the changes that may occur include an improvement in rates,
a change to one’s health, inheriting money or getting a divorce.
With
a lifetime annuity you cannot adapt your income to these changes because you
are locked into your product for life. However, with a fixed term annuity you
can opt out of your product either at the end of the term or in some cases
during the term, using a conversion feature. In this respect, they provide a
great deal more flexibility than a standard annuity which cannot be altered at any
point. However there are some drawbacks to choosing a fixed term annuity. For
example, if rates were to fall then you would be worse off when you do come to
buy a life annuity in the future.
Deferment
If
these two options do not appeal then the only choice to avoid low rates maybe
to carry on working and retire later. This will allow you to build up a bigger
pot so that when you do buy an annuity, you will have more money and maybe able
to benefit from any improvement in rates. In fact just by retiring later you may
be offered a better rate as older retirees are calculated to live for a shorter
period compared to younger retirees. You can also take an annuity and carry on
working on a part -time basis, which will help to supplement your income.
About
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This
article was provided by the content team at 123AnnuityRates where you can read more about annuities and pensions.
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