There are many pro’s and con’s to annuities. Here we detail a few of them.
One of the main benefits with an annuity is that your income is guaranteed – you will receive a fixed monthly payment each and every year until your death.
You finances will keep up with rising prices
You can also choose annuities that will increase in value every year in line with retail inflation. This will ensure that your income in older age keeps up with the rising prices of goods and services, giving you a consistent and comfortable retirement.
Get paid more if you are poorly
If you are in poor health, you can take out an enhanced or impaired annuity which will pay you out a higher income than a standard annuity – it can be as much as 65% more. This is because the your insurance company will have to pay out for a shorter amount of time due to your decreased life expectancy. This is a potential major area of mis-selling. For more information please see our mis-selling section on the website.
You can’t change your mind
By far the biggest downside of buying an annuity is that the decision is irreversible – this is likely to change from April 2016. You cannot currently ‘move’ annuity providers for a better deal, like you can with your bank. This means that you have to get the decision right first time. The new pension rules will mean that you won’t be compelled to buy an annuity anyway. In April 2016, it is likely that the re-sell market for annuities will come into play, where you will be able to sell your annuity back to receive a one off payment, in return for the buyer receiving your monthly payment.
You can’t leave anything behind when you die
This changed in April 2015. Now, your spouse, partner or beneficiaries will receive the payments from a
joint life, guaranteed or value protected annuity tax-free if you die before age 75. Payments will be taxed at the beneficiary’s marginal rate if you’re over 75.
Rates can and will fluctuate
Annuity rates aren’t just based on you and your circumstances – they are also based on the return on investments annuity providers use to fund the business. If these are funds and rates are performing poorly at the time when you retire, you may possibly get a lower rate. Rates are also getting lower because providers have to account for people that are now living for longer.