Comparing Annuities is more Important than Ever

8th December 2011

Every week 5,000 people turn their pension pot into an income for life by buying an annuity.  But annuities have never been such bad value with a combination of falling gilt yields, quantitative easing and people living longer which means that rates are at an all time low.

Unfortunately with the current economic climate as fragile as it is, this unlikely to change much in the near future.

This means that searching for the best annuity before purchasing is increasingly important, but all too often people accept the first offer which is usually from the existing pension savings supplier.

Better paying annuities can be bought from other providers by shopping around, and it is vital that the annuity is appropriate, taking into account heath and marital status for example.

However there are also other opportunities such as income drawdown, fixed term annuities and investment linked annuities.  Most people don’t realise that there are other options that can and should be considered.

Income drawdown allows people to take an income from their pension savings while leaving it invested in the stock market. It is an alternative to an annuity – which involves you handing over your pension savings to an insurance company in exchange for a guaranteed annual income for the rest of your life.

A fixed term annuity could provide an income for, typically, 5 or 10 years.  At the end of the period there would be the opportunity to buy a traditional annuity, hopefully at better rates.

Whereas conventional annuities focus on corporate bonds and gilt yields, asset backed annuities invest in other, higher risk stock. Rather than take a fixed or escalating annual pension income, an asset backed annuity (such as a with-profits annuity or a unit-linked annuity) allows retirees to invest a portion of their pension pot into an investment fund which is managed by the pension provider. Although with-profits a unit-linked annuities work in different ways, you can in both instances maintain more flexibility over the investment of your money. These are all examples of investment-linked annuities.

With so many options to consider taking advice from a Financial Adviser would be a sensible option!

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