What is an annuity?
An annuity is a tool to fund a secure retirement for as long as you live. You may have made provisions for their retirement in a tax-free pension savings scheme, allowing a large lump sum to accrue over the years. You may use this lump sum to purchase an annuity, which offers a secure, guaranteed regular income for the rest of your life.
The amount of income you receive in a conventional annuity will depend on a few different factors such as:
Your age
Your Sex
The size of your pension fund (the initial lump sum)
The state of your health (in some circumstances)
The providers who exchange your lump sum in return for an income include:
Prudential
Aviva
Legal & General
Canada Life
AEGON Scottish Equitable
An annuity is the only product that offers total security for the rest of your life. In these years of increased life expectancy, this is one of the most important things to remember.
What are the benefits and drawbacks of annuities?
Annuities are a government backed, longstanding institution of the retirement world. There are no doubts about their credibility or their usefulness in helping you plan out and fund your retirement. There isn’t another product on the market that guarantees such an income for the rest of your life. For most, this security is their biggest benefit.
No one can predict their own lifespan, nor how long they would need to make their nest egg last if they were to manage their own money. An annuity takes the pressure off your golden years and gives you peace of mind.
However, with the recent financial turmoil, it is important to know how the annuity market has been affected. Interest rates have fallen dramatically and the stock market has been offering poor returns. This is a double edged sword for the annuity markets as it means that many will have smaller lump sums than initially planned. It will also mean that annuity providers are less able to make profitable returns on your lump sum, meaning that the annuity rates they can offer you are somewhat smaller than previous decades.
Whilst it is true that annuity incomes have become smaller, much of this has been a result of unavoidable financial turmoil. In such unpredictable markets, an annuity, albeit smaller one, offers security of income like no other. One should try and seek an annuity that is linked with the RPI, allowing for increased payments every year. This will help your annuity payments to continue to meet your spending needs.
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