Alternatives to an annuity

Thursday, 26 March 2009 00:24

If they did not buy an annuity at retirement, then when pensioners reach 75 they must decide how to secure an investment to give them an income for the rest of their lives. Of course, the problem these days is that, with interest rates at an all-time low, the options for a good return have all but disappeared.

At retirement many people choose to leave their pension cash invested and draw down an income to live on. They hope that the fund will grow above the income they are taking. Anyone turning 75 this year must be worried about their unfortunate timing, with stock markets down, pension pots having declined and annuity rates down.

What are the alternatives?

A conventional annuity

A lump sum investment of £260,000 would currently secure a life-time pension of £24,600 per annum, or £21,844 for a joint annuity to cover a spouse too (who may live longer). The advice from experts is to buy an annuity sooner rather than later this year, as rates will continue to fall.

An investment-linked annuity

With this investment your pension fund is put into a with-profit or unit-linked fund. From this you can take an income, but it will be lower than with a conventional annuity. If investments should improve over coming years, then so could your income; but the reverse might happen too. There may also be exit penalties.

An alternative secured pension

You could transfer your fund to an ASP to “ride out the storm” until markets recover. Income from an ASP is smaller than with drawdown, and death benefits also deteriorate over time. ASPs are also subject to higher tax on transfer.

Flexible investment-linked annuities

These can allow you to draw 120% of a conventional annuity even after 75. Once your fund falls to a third of its value, you must buy an annuity.

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