Temporary Annuities offer Alternative

15th May 2012

With the current disillusionment with annuities, a solution may be to get a temporary annuity.

Current annuity rates are very low and they are not expected to rise in the near future. Temporary annuities allow retirees to purchase an income for 10 years with the option to re-invest the remaining pot after this time, as providers promise to return a guaranteed capital sum when the plan matures.

Hopefully in 10 years time the economic outlook will improve and the rates will be better but there are other advantages in delaying. Temporary annuities also give people in retirement the potential to secure a higher income if they develop health problems after taking out their plan. At the end of the term, they may be able to use the guaranteed capital sum to buy an “enhanced annuity” which pays significantly more income to those with medical conditions.

With most temporary plans, clients can opt out as soon as they develop health problems – so they can secure an enhanced annuity straight away.

As with any solution, however there are drawbacks. Many argue that they are a high-risk choice as a sole source of pension income, because the direction of future annuity rates is difficult to determine.

Interest rates, as we all know, can go down as well as up. If in 10 years time the rate is lower than it is now, the new annuity will produce a lower income. Additionally, a temporary annuity pays out less than a standard annuity.

As always, it is worth discussing your options with an Independent Financial Adviser who will be able to provide advice on the best option for your individual circumstances.

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