Last week, I used the word “annuity”. When I saw the look on my client’s face, I realised that it had become a dirty word!
As you may know, the Government announced new pension freedoms in the 2014 Budget, that started in the 2015/16 tax year. This means anyone aged 55 and over can now take the whole of their pension as a lump sum. There is no tax to pay on the first 25% and the rest will be taxed at their income tax rate, as if it were a salary payment.
The announcement was a surprise to many. As a child, my mum told me she could remember exactly where she was when she heard about the assassination of J F Kennedy. The impact on me and my financial adviser colleagues was similar when we first heard about pension freedom!
One of the reasons the Government introduced pension freedom was due to the drop in annuity rates. To put it simply, in 2000 the income from a £100,000 joint life annuity at age 65 was about £7,000, But by 2016, the same annuity would pay only about £4,200.*
Because of the new pension freedoms, many of my clients seem to think annuities are now a thing of the past – but they could still be a valuable part of their pension planning.
An article in March 2017 in FT Adviser quotes figures from the Association of British Insurers (ABI) that show annuity sales have declined by around 80% since the announcement of pension freedom in 2014, and have remained around that level since then.
However, annuities are not something that should just be ruled out.
Today, a joint life annuity of £100,000 paying 50% to the spouse on first death and guaranteed for 10 years would give an income of around £5,000 where the applicant and spouse are 65. On the other hand, a drawdown pension would need to grow at 5% to maintain its capital value and give this level of income after charges.
I still think it is important to consider annuities – it doesn’t need to be all or nothing, and it doesn’t have to die with you.
Annuities come in many forms today. Most of us think that an annuity is for life, but you can get fixed-term annuities. There are also enhanced annuities, which is when annuity companies offer an enhancement due to an individual’s medical history. It could just be because someone is overweight, so it’s important to look into this.
Obviously there are advantages and disadvantages of both annuities and pension drawdowns, and retirement planning has become even more complex. It’s therefore more important than ever to seek advice and look at all your options.
At Monetary Solutions Ltd, you can book a free initial consultation about any financial matters, so please call us on 020 8655 8488.
* Money Marketing 29 Nov 2016
Pension income can also be affected by interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation, which are subject to change in the future.