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Cutting through the Annuity rates noise

In case anyone had not already noticed, annuities are back in fashion.

Their resurgence in popularity has been apparent since Liz Truss’ so called ‘mini Budget’, when the Bank of England felt the most appropriate response was to raise interested rates. As we all know, interest rates have been rising ever since, and are currently sitting at 5%.

And this has resulted in annuity rates rising to 14 year highs, which has created a surge in interest in annuities

And it is possible to understand the appeal. Indeed, Annuities promise the long term security of a guaranteed income for the rest of a retirees life, or for as long as they agree with their annuity provider, regardless of wider economic volatility.

Recent research revealed that over a quarter (28%) Britons aged 50 and over either have an annuity, or are considering buying on. Whilst some industry experts consider this to be a fairly low figure, when considering the mass ‘shunning’ of annuities, prompted by the 2015 pension freedoms and years of rock bottom interest rates, the aforementioned research could suggest that the annuity tide is starting to turn.

But, are annuities the fail-safe option savers are hoping for?

A case for annuities

Given the current economic volatility facing Britons, it is understandable that many will be craving certainty and stability. And arguably, annuities can offer just that.

Annuities are a retirement finance products which offer retirees a fixed income for the rest of their lives (or a pre-agreed period of time in the case of a fixed-term annuity), in exchange for part or all of their pension savings.

The amount a person receives in a fixed income is dependent on two key factors: the size of a person’s pension and annuity rates.

Of course, a major influential factor when it comes to annuity rates is interest rates. This is because annuity providers typically buy government bonds to generate returns – and these returns are closely linked to interest rates. So, the higher interest rates tend to be, so too are the general market rates for annuities. And with interest rates currently as high as they are, it is possible to see the potential appeal of annuities.

Pause for thought

That said, pension planners would be wise to restrain from rushing into any decisions regarding annuities. There are certain considerations which must be made to ensure that people are making the right decision for them.

Firstly, it is important to remember that interest rates are not the only factor which influence annuity rates – a person’s age, health and retirement goals will all factor into a person’s individual annuity quote. Generally, the younger an annuity applicant is, and the better health they are in, the lower their annuity rate tends to be. This is because such individuals tend to live longer, and the provider will need to commit to their fixed term for longer. So, after a consultation with an adviser or an annuity provider, a client may actually be quoted less than they might have expected, because of their individual lifestyle choices.

A further, perhaps more important point to consider is that when a person purchases an annuity, the income remains fixed for the rest of their lives (or the pre-agreed timeframe). This means that their income will not benefit from any further interest rate rises. Nor will the annuity account from any potential increases in inflation, which could mean that they might fight themselves worse off in the long term, and unable to change their circumstances.

Considering alternatives

Of course, the retirement finance market is incredibly broad and there a plethora of different options to choose from.

For example, flexible access drawdowns allow retirees to choose exactly how much they want to withdraw from their pension and when they choose to do so. Further, the proportion they do not withdraw remains invested, so there is scope for savers to grow throughout their retirement. And there are plenty of different funds available, which are designed to suit different preferences including the amount of risk someone is prepared to undertake with their investments.

Of course, such investments do carry risk, and the successful growth of the fund is not guaranteed. This might mean that such a retirement finance option might not suit everyone. And this makes it all the more important to seek independent financial advice.

The importance of advice

When deciding upon a route to retirement, it is vital for Britons to select an option which suits their specific needs. As such, pension planners would be wise to speak to an independent financial adviser before making a decision.

Independent financial advisers, like our expert team at My Pension Expert, are able to take into account the entirety of a person’s current circumstances, the level of risk they are comfortable and capable of taking on, as well as their future goals in retirement. From there, they will make a personalised recommendation which suits their specific needs. For some, this might be an annuity. For others, investments of a flexible access drawn.

Annuities have been thrust back into the spotlight over the previous 12 months. And it is certainly possible to see their appeal. However, the key to determining whether they will truly suit some’s needs is to consult an independent financial adviser, and exploring all other options before making a final decision. Following this, people will be able to rest easy, knowing that their retirement plan is the well suited to their needs.