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   Retirement Options - Lifetime Annuities


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      Safe - but expensive and irreversible

 

Topical Issues

 

With a traditional annuity, you pay the money in your pension pot to an insurance company in exchange for a guaranteed income for the rest of your life. After your death, the income ceases and the insurance company keeps the balance (if any) of the initial investment.

 

You can purchase an annuity based on single or joint lives. A so-called ‘reversionary annuity’ is also available, in which the pension is payable in full for the lifetime of the annuitant and then on their death a reduced pension will be payable to their dependant.

 

Annuities offer a number of benefits over other kinds of retirement options, which are specially relevant for those who are not able, or indeed willing, to take any risks with all or a portion of their retirement savings.

For example, annuities can offer:

 

Lifetime Income – With an immediate lifetime annuity contract, you are guaranteed periodic payments for as long as you live. The "risk" of you living a long and happy life is thus borne by the insurance company providing the annuity.

The major limit to the size of your periodic annuity payment is the amount of money you have to purchase an annuity. |Remember though, that generally speaking, the older you are when you but the annuity, the larger your monthly payments will be for any given annuity price.

 

Inflation Protection – You can customize annuities to ensure that your monthly payout will keep pace with the cost of living. This is critically important because inflation can have a devastating effect on your assets. The downside of added-on inflation protection is that it can be fiendishly expensive and either make a big increase in the initial annuity costs or provide a significantly lower payout from the start of the annuity period.

In summary, an annuity can be a sensible way to give you ‘peace of mind’ and ensure that you receive a known sum each month for the rest of your life irrespectively of how long you live.

Despite these advantages of annuities, they do have some significant limitations. The prime problem is that they are quite Inflexible and once you have purchased an annuity contract your capital is gone for good and you no longer have access to the money.

Another problem is their price. As discussed elsewhere on this site (you can follow this LINK), it is debatable whether or not annuities offer decent value for money at the moment or simply have become too expensive for their worth.

You should remember that part of the money you receive from an annuity in fact is your won money that you paid back to you little by little.

 

So, if you buy an annuity for £100,000 and receive £5,000 a year it will effectively be your own money that you get back without any interest for the first 20 years! Only after that time will you actually receive anything more than you would have got by simply leaving the money ‘under’ the proverbial mattress. And, you would have had the option to access your money it or when you wanted (e.g. for unforeseen expenses etc.).

 

Finally the concept of OMO should briefly be explained. OMO is an acronym for Open Market Option.

 

In the past it was common practice when approaching retirement, that you received a letter from you  pension scheme provider, simply stating that you could get your 25% cash-free lump-sum and by signing the enclosed forms they would purchase an annuity on your behalf.

 

The problem with this arrangement was (and still is, in many cases) that the pension provider has absolutely no interest in your welfare or whether or not you starve to death in old age. Their only interest is, within certain limits, to make as much profit as possible, so they will most likely chose the annuity provider that pays them the largest commission irrespective of whether or not it is the best deal for you.

 

To try to stop this ‘malpractice’ it has now been demanded by law that annuitants must be offered the opportunity to ‘shop-around’ and try to find the best deal available to them before purchasing an annuity.

 

The intention with the OMO option is a good one but in practice it may not be that easy for a non-expert to evaluate all the various annuity option there currently are available on the market – at a time where there may be many other urgent matters to consider. So, be wary… 

 

Consulting a good independent financial adviser could add £1000s to your annual retirement income over the next many years. You should however beware of tempting adverts offering FREE advice on selecting the right annuity and make sure that you read the small print as many of these ‘kind’ offers are made by people who still directly (or indirectly) may have a financial interest in recommending their own annuity, or one from which they receive some form of commission or ‘bonus’.

 

Whatever view one has on lifetime annuities one thing is certain: once they are bought, that is it – you are stuck with them for the rest of your life and you can not change your mind. So, it is rather important to get it right first time, as there will not be a second option!

 

I don't want to retire right

now - maybe next year, or

the year after...

But, can I afford to cut down

on my work hours already?

     find out more 
 

Is it a good idea to buy an

Annuity now or is it better

to wait?

Should it be a single or a

joint annuity?

     find out more 

 
retired couple

What is the best way to

arrange your Investments?

How much risk can you

afford to take?

How much income can you get?

     find out more 
   

 

 

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NOTE: The value of investments can go down as well as up and you may not get back as much as you put in.

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You are always Welcome

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of your Annuity plans

 

Phone: 01603 452686

 

 

e-mail: info@norwichpensions.co.uk

 
     

 

 

 

 

 

Norwich Financial Advice Limited  is authorised and regulated by the Financial Conduct Authority

and is entered on the FCA Register under FCA reference: 706645

Norwich Financial Advice Ltd. is registered in England and Wales; Company No. 8533929.  

Registered office: 74 Muriel Road, Norwich NR2 3NZ, Norfolk, England.