why do you have to buy an annuity

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font-weight:700; margin-bottom:1em; }. standfirst p { font-weight:700; } due to record low interest rates and widespread resentment at having to lock into a lifelong contract. The moment pension freedoms were announced, annuity sales plunged. Just 80,000 people a year now buy one, down from around 400,000 before. Many over-55s now opt for income drawdown, which involves leaving your money invested and drawing income as you need it. This is right for some, but not everybody. Read more:P Annuities have one major advantage that you cannot get elsewhere: they pay a guaranteed income for the rest of your life, no matter how long you live. This is particularly important as life expectancy continues to rise, which means your annuity is likely to pay out for longer. The big danger with cashing in your pension is that you will spend the money too quickly, and deplete it before you die. Many could spend their final days scraping by on the state pension, and may also be blocked from claiming means-tested benefits if the authorities deem they spent their pension recklessly. This will not happen with an annuity, the income will keep rolling for as long as you do. Anyone who can afford to take some measure of investment risk could do an awful lot better on a do-it-yourself basis. Aviva will pay you a fixed yield of 5. 5pc on its 22-year corporate bond, with your capital back at the end of the period or on earlier death.

A 63-year-old man might live for another 22 years and he could buy an annuity paying 5. 5pc a year for life with no capital on death. Even if you live to 100 or more, having бе100,000 capital preserved is a decent return for the risk. Aviva might default, of course, and I don t for one minute suggest that people put all their eggs into one bond investment. But a mixture of bonds, shares and property ought to do a much better job than an annuity, especially if inflation takes off. 2. Even enhanced annuities are no better \”Enhanced\” annuities pay a bigger annual income to people in poor health because insurers acknowledge that they won t live as long. Enhancements vary between a few per cent and more than doubling the rate for the more severe conditions. One man I helped has motor neurone disease and a very uncertain life expectancy; his specialist said three to five years when he was diagnosed two years ago. He could have bought an enhanced annuity that pays more than double the rate for healthy people 12. 5pc rather than just under 6pc. But if he died within a few years, as was highly likely, he d have lost more than half of his fund. We could have protected the fund by buying a guarantee that payments would continue for at least 10 years, but that reduced the rate to 8. 7pc in other words, getting back only 87pc of the capital and zero investment returns.

Adding his wife to the policy just turned the annuity into her annuity. Unless he was an exception, like Stephen Hawking, he would be better off drawing chunks of his pension as and when needed, leaving the rest untouched. Anyone who has less than 12 months to live as certified by a doctor based on the balance of probabilities can access their whole pension fund tax free. 3. There\’s another better way to get a guaranteed income What about an annuity\’s \”insurance value\” making sure you don t run out of money no matter how long you live? I m a big advocate of covering your essential expenses with secure sources of income such as the state pension, a final salary pension or an annuity. Consider Dave, 65, who receives бе6,000 from the state pension and бе4,130 from a final salary scheme and has a бе100,000 pension pot. Dave needs a minimum of бе1,000 a month (бе12,000 a year) to cover his essential outgoings, so he has a бе1,870 annual shortfall in secure income. He could spend бе55,000 buying an inflation-linked annuity to cover the shortfall. He could also spend бе33,000 buying a \”level\” annuity, which means taking some risk with inflation. But better still he could defer his state pension for three years, spending бе25,000 of his pension fund to cover that missing income and the shortfall.

That way, when his state pension starts, it has been increased to the point that the missing бе1,870 a year has been covered. (. ) Why buy an annuity for бе55,000 when the state will provide the same benefit for бе25,000? The small minority who should still consider an annuity There are limits to state pension deferral: the longer you defer for, the less valuable it is, and your state pension can only be boosted so far. For people with very high essential outgoings relative to their state pension who can afford to buy an annuity despite its poor returns, I would advise doing so. Also, if you are in very poor health and have no dependants or beneficiaries to whom you wish to leave your funds should you die at young age, again an annuity would be suitable for you. Before the Budget, more than 90pc of people bought an annuity with their pension savings. In the future, state pension deferral terms will become less generous and people s retirement pots will be far bigger, so I expect the annuity to return. But I think very few people making a positive choice about their retirement today would conclude that an annuity is the best option. Alan Higham is retirement director at Fidelity Worldwide Investment

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