When is the right time to buy an annuity?
Annuity rates are low, meaning buying a secure income might not be the most popular retirement option at the moment. But we reveal when they could be a good choice.
This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.
22 October 2019
In 2019 alone, annuity providers have changed their rates 47 times. And despite a brief upturn in the past couple of weeks, they’ve mostly been decreasing. In fact, the best rate on offer now is almost 8% lower for a 65 year old than at the start of the year.
The table below shows the available income from a non-increasing annuity, using a £100,000 pension.
|Income at the start of 2019||£4,776||£5,413||£6,099||£7,055|
Source: HL Annuity Index; single life, non-increasing annuity, guaranteed for 5 years and paid monthly, as at 10 October 2019.
With low annuity rates, the more attractive option might seem to be keeping your pension invested. Though this does carry more risk as investments rise and fall in value, meaning you could make a loss.
When should you consider buying an annuity?
Anyone who doesn’t want to worry about the stock market in retirement should consider an annuity. It will provide you with a guaranteed income for the rest of your life. It doesn’t matter how long you live, or what happens in the markets. The amount of income you receive will depend on the value of your pension, your circumstances and the options you choose.
If you’re happy to keep your pension invested, and plan to semi-retire before giving up work completely, you might not benefit from buying an annuity straight away.
Your retirement could last 30 years or more, and so your income needs will probably change during that time. In the early years it's possible you’ll want a more flexible income, and in the later years you might be after more security. Especially once you’re no longer working.
A sensible strategy could be to consider using drawdown to help supplement a drop in earnings and then look to buy an annuity later on. Even if you don’t choose a secure income when you first access your pension, you can still change your mind in the future. You can use some, or all, of the money in a drawdown account to buy an annuity.
Once set up, an annuity can’t be changed so it’s important you consider your options carefully.
Taking an income from drawdown
If you only have a defined contribution pension, like the HL SIPP, and you decide to move it into drawdown, you’ll need to make sure you take sustainable withdrawals.
You could consider just taking the income produced by your investments. This strategy is also known as taking the natural income or natural yield. This means you’d only take the dividends or income awarded from funds and shares, rather than sell your investments to fund your income.
The reason this strategy is so effective, is that whilst dividends can fluctuate they are less volatile than share prices, provided you have a diversified portfolio. This is because dividends are dictated by a company’s underlying profitability, whereas share prices are generally determined by people’s sentiment towards owning shares, and human beings don’t always act rationally.
It’s important to remember though that dividends aren’t guaranteed. Income will vary, and dividends paid in the past don’t provide a reliable guide to the income you’ll get in future.
By choosing to keep your pension invested, not only will you be faced with selecting an appropriate level of income, you’ll also need to think about what investments to choose to help produce a regular income.
There are around 100 funds available that pay an income greater than you can get from an annuity aged 65. Around 30 of these pay a monthly income, and about 40 quarterly with the remainder paying only once or twice per year.
Why waiting for an annuity could be worth it
A good time to look at buying an annuity, in our opinion, is when you give up work completely. You’ll no longer have a steady income stream from your earnings to cover your essential bills, and an annuity can help cover these. You can then use drawdown for any nice-to-haves.
Rates also tend to be higher for older people, especially those with medical conditions. As you age, you’ll potentially develop health conditions which, even if they’re minor, could boost how much annuity income you’ll receive. However, there’s no guarantee the rate you get in the future will be higher than the rate you could get now.
It’s worth getting annuity quotes regularly once you’ve stopped working. It will help you to keep an eye on ever-changing rates, plus it won’t cost you anything. You may want to look at buying several smaller annuities using a bit of your pension at a time. This allows gradual de-risking of your overall pension, reduces the risk of locking all your money into an annuity at one point in time, and allows you to shape your retirement based on your changing circumstances.
What help is available?
If you’d like to discuss your retirement options, you can call our Retirement Helpdesk on 0117 980 9940. They’re available six days a week: Monday-Thursday 8am-7pm, Friday 8am-6pm and Saturday 9:30am-12:30pm.
What you do with your pension is an important decision. We strongly recommend you understand all your options and check that the option you choose is right for your circumstances. Take advice or seek guidance if you’re unsure.
The government provides a free and impartial service to help you understand your retirement options - more on Pension Wise.
This article isn’t personal advice. We offer a range of information and support to help you plan your own finances. We also have an award-winning advisory service that can help you achieve your goals.
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