Should You Still Buy an Annuity?

FUTURE PROOF: In March's Budget George Osborne announced pension reforms which meant no one would have to buy an annuity. But should you still consider one?

Emma Wall 30 July, 2014 | 9:40AM

Ready to retire? In the past, unless you could prove considerable income in retirement, you would have to buy an annuity with your accumulated pension savings. An annuity guarantees a steady income stream in retirement – either the same annual income every year, or if it is index-linked a growing income to combat inflation.

The trouble with annuities is they are linked to gilt rates, meaning that what your pension pot bought you a decade ago is considerably different to what that same amount of cash would buy you today. Many people also failed to exercise their open-market option, instead buying the first annuity they were offered by their pension savings scheme provider – and shopping around could boost your retirement income by up to a third.

The deadline nature of an annuity purchase has also proved problematic. Pension schemes build up their value through investment in the stock market, meaning the lump sum you have to purchase an annuity is sensitive to stock market fluctuations. Those retiring in 2006 for example, before the FTSE 100 lost considerable value, would have had a significantly larger pot with which to buy an annuity than those retiring in 2008.

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About Author

Emma Wall  is former Senior International Editor for Morningstar

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