Getting the most from your pensions and savings is, of course, very important to maximizing your retirement income. It isn’t, in fact, just the total size of these savings that are important as you enter your retirement. The way in which you withdraw these savings in a regular income is key and that is where annuity rates come into play.
Finding the best annuities
“When approaching retirement, there is one key step that everyone should take to ensure their financial future is well planned for: that is to speak to a financial advisor,” says Geoff Alderton of the Banking Times.
“More specifically, IFAs (Independent Financial Advisors) have access to the entire open market for annuities. That means they can compare the offers from all of the different providers.” Geoff explains the open market option and 2013’s best annuity rates in more detail here.
What is an annuity?
An annuity is a finance solution that exchanged a large sum of pension savings for a regular income. This income can be a fixed, guaranteed to amount or it can be variable (e.g. linked to investment returns).
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Another important consideration are enhanced or impaired life annuities. These are plans for people who have health issues that can cause reduce life expectancies. This includes illnesses and disease, diabetes, obesity and smoking.
What is an annuity rate?
An annuity rate is shown as a percentage, e.g.
This rate is the percentage of the total amount of your pension that is being offered to you per year as a regular income. So the best annuity rates are higher and provide a greater percentage figure per year of your pension pot in income.
But rates are so low now. Why?
Annuity rates have been tumbling for more than 20 years. The main cause of this is the simple fact that people are living longer. This means a higher amount of monthly payments as pension pots are being spread more thinly over a great period of time.
Another compounding factor is the poor economic climate of the last six years. This has led to higher demand for government bonds (seen as ‘safe bets’) which also hurts annuity rates as most providers invest in these funds which have been paying low returns in recent years.
Are there other options to annuities?
Yes and they have grown in popularity in recent years. Income or pension drawdown is the main alternative. This allow you to leave the bulk of your pension in asset investments and to drawdown profits or portions of it over time. This is typically for larger pension pot funds.