The annuity you will be offered as standard by most pension companies will be a single life level annuity. It usually offers the highest starting income (although if you have some health conditions you could get more with a different type) but this kind of annuity has many drawbacks which you may not understand. Therefore, it is vital to think carefully before buying an annuity. The best thing you can do is to get independent financial advice to help you with the decision. There are other types of annuity available, but the standard and most commonly bought annuity has many drawbacks and needs risk warnings to help you understand before you buy – because once you have bought you can never change this standard annuity. So here are ten of the things you need to think about before you commit to buying an annuity:
1. Current rates close to historic lows: Annuity rates are currently exceptionally low and offer poorer value than almost any time in history. Do you want to put all your pension savings into one product which is already very expensive?
2. Stuck for life: Once you’ve bought an annuity, you can never change it, that’s it for the rest of your life. If you are relatively young (in your 60s is not ‘old’ any more for many of us) you have no second chance if things change.
3. No help if your circumstances change: If you wait till you are older, you may be able to use your pension savings to reflect any change in your circumstances, but once you have bought the annuity you cannot.
4. No help if your health worsens or you need care: If you have not yet bought an annuity and your health deteriorates, you should get a much better rate, but if you have already annuitised you will lose out. If you or your partner need care, your pension cannot provide extra money.
5. Today’s interest rates are artificially low: Buying an annuity means locking into today’s interest rates. If rates go back up again, you will never benefit.
6. No inflation protection: You will have no protection against inflation, as the standard annuity offers only level payments, so your pension will buy less and less over the years ahead.
7. Can never benefit from rising investment markets: If investment markets perform well, you can never benefit from the rises.
8. If you die soon, insurer keeps most of your money: If you die soon after buying, the annuity company keeps most of your pension savings, with nothing for your family – you will have lost all your capital .
9. Tax advantages: You may have other pensions, and may not need the extra few pounds a week a small pension pot would buy you. A £10,000 fund pays around £10 a week annuity income from age 65 but if you don’t need that extra money, and you die before age 75, the whole £10,000 can pass to your estate tax free.
10. If you keep working, you may be better to wait: You may decide to keep working part-time so you don’t need the extra income yet and can keep your options open for the future.