In the old days (and still now) it was almost a standard option that you would pay money into a Pension, then use the fund that was built up to buy an annuity. This annuity would pay you an income for life.
More recently annuities have taken a bit of a hammering because they don’t pay the same level of income compared to what they used to, partly down to the low interest rates we’re seeing right now.
So the Government brought in Pension rule changes that really kicked annuity providers while they were down. They said to the nation of Pension savers that they could access their Pensions not with the rather limiting options of Capped Drawdown or Flexible Drawdown, no. Pensions savers can instead do whatever they like with their Pension money. They can access it any which way they like – just like a bank account or an ISA.
So why the hell would anyone buy an annuity? Well to understand that you need to understand what an annuity is. It is a guaranteed income for life, regardless of how long you live.
I hear a lot of “well I don’t know how long I’ll live” comments, and everyone unfortunately seems to know someone that has passed away before they should have. But that doesn’t get away from the fact that we are all expected to live longer than ever before. The chances are you will live for an incredible number of years after you retire.
While you are working you hopefully enjoy a level of regular income that covers your costs. In retirement an annuity simply carries that on for you. That is, it provides you with a regular income so you don’t have to worry.
If you don’t buy an annuity the alternative is that you manage your Pension yourself, carefully nursing it through your undetermined number of years, making sure you maintain a growing level of capital and a consistent level of income. That is difficult to do in reality unless you are very careful and have a good investment strategy in place that is constantly monitored. Chances are, in my experience, if you have a lump of capital that can be accessed and spent, it will be. So when you run out, you have a problem.
I always suggest to clients that it is a good idea to make sure their regular level of expenses are covered by guaranteed income. Your lifestyle is too important to risk, especially in retirement. Buying an annuity gives you a guaranteed level of income for life which gives you much greater certainty, and hopefully frees you to enjoy it more.
In summary, like any aspect of financial planning it really depends on your situation and wider financial picture. But annuities are certainly a valuable tool in any retirement planning in my view.