Annuities are the comeback kids of retirement planning

• The Attractive Income They Offer Means Annuities Rejoin Retirees’ Shopping Lists
• Annuity buyers can now secure 7% of their lifetime earnings
• Compare current income provision with pre-financial crisis 2008

Rising interest rates have allowed pension pensions, once stigmatized by most, to make the biggest comeback since Lazarus. Offering an attractive income for those looking to put their pension pot into retirement funds means they’re back on many retirees’ shopping lists.

Mathematics is compelling. Ten years ago, you could buy an annuity that guaranteed a lifetime income of 4% per annum. In other words, for every £100,000 of the pension fund converted into pensions, retirees will secure an annual income of £4,000 (paid monthly).

Today, primarily due to skyrocketing interest rates and higher bond yields, annuity buyers can now secure a lifetime income of 7%.

A 65-year-old receiving a £100,000 pension will now be able to purchase an annual income of £7,144, according to asset manager Evelyn Partners. If this person were to enjoy retirement for the next 20 years, his lifetime earnings would be £142,880 and he would pay £100,000.

Experts say income from new pension purchases is now higher than before the 2008 financial crisis, the catastrophe that ushered in an era of low interest rates and brought the pension market to the brink of death. ing.

Henrietta Grimston is an Associate Director at Evelyn Partners. He said the next few months “will present an attractive buying opportunity for those seeking the security of pension income that annuities provide.”

Mark Ormston, director of annuity firm Retirement Line, said that if the Bank of England’s base rate rises to 5.5% in the coming months, as many expected, it is unlikely that pension rates will jump to 10%. He says that it is not impossible.

But Billy Burroughs, a pension expert and founder of the Retirement Planning Project, is more cautious about the future direction of pension rates.

He says: “Current annuity rates are very good. There are signs that inflation is coming back under control, so bond yields and annuity amounts are unlikely to rise significantly further. Now could be a good time to buy an annuity.”

Pensions can be purchased by those who have established a pension fund on a defined contribution (or money purchase) basis. Such arrangements are now commonplace.

Sales figures show that pensions are now firmly regaining the attention of many retirees. Annuity sales rose 22% in the first three months of the year as savers fought for financial security in retirement, according to the Association of British Insurers.

The pension fund amount used to secure these pensions was £1.2 billion. This is the highest quarterly figure since 2015, when the coalition government introduced policies aimed at giving retirees greater choice in how they use their pensions to finance their future lives.

These measures, called “pension freedom”, were designed to give retirees an alternative to the bondage of pensions.

Since then-Treasurer George Osborne introduced these rules, retirees who hold defined contribution pension pots have had access to their pensions at will, but the amount exceeds the tax-exempt cash they can withdraw. subject to the payment of tax on Usually he is 25 percent of the value of the pension pot.

Lorna Shah is a managing director of insurance company Legal & General. she says: “Annuities give you a guaranteed income for the rest of your life, regardless of interest rates or what’s happening in the world.” ” But there are also drawbacks. The previous example shows how well you could do if you bought gold this year and lived another 20 years, but not everyone lives that long.

For these people, an annuity means less monetary value. However, insurance can be set up on a joint living basis. This means that you will continue to pay your surviving spouse your income (albeit at a reduced rate).

When receiving an annuity, the purchaser can choose beneficiaries who continue to receive income, but this is more expensive.

Also, the example cited is for a “flat” pension income. It will cost you more if you want to increase your income regularly to combat inflation. The same guy can buy £100,000 for just £5,086, an annual salary that increases by 3% a year.

Is canceling my pension a better option?

Annuities are back in popularity, but not everyone cares about them.

A “drawdown” is another way to use your pension pot as a retirement fund. Pension funds continue to invest here, with cash withdrawals funded by the sale of some of the pot assets.

Such arrangements give you control over when and how you receive your pension income. For example, withdrawals can be made to cover big-ticket items such as home renovations or new car purchases. A drawdown also means that the annuity pot could continue to grow in value, but likewise could fall in value if the stock market deteriorates. You can also leave a fund to your loved ones in a will, but this is a privilege not given to pension plan holders.

Those opting for drawdowns should be aware that fees can erode the value of the fund. Another risk is that retirees may not be able to take full advantage of their pension funds, fearing they will run out.

One smart approach is to use part of your pension savings to buy an annuity and leave the rest behind. Those who have already drawn down can take advantage of the higher interest rates and use their remaining funds to purchase annuities.

Find the Best Pension Quote

Those choosing the pension route should hunt around for the best value plan. For healthy 65-year-olds, the difference between the best and worst pensions available is so large that they bought an annuity, according to an analysis conducted last week by retirement experts The Age Partnership for The Mail on Sunday. Equivalent to £550 a year. £100,000.

Samantha Patterson, Head of Retirement Guidance and Customer Engagement at Age Partnership, said, “It’s an incredible time for pension customers. It creates competition.”

The pension amount depends on your age and health status. The older you buy, the better rate you should get. Also, people with poor health or a history of smoking should benefit from higher pension payments.

For example, Canada Life offers smokers with a high body mass index a pension rate of 7.77 per cent (£7,770 per annum for a £100,000 annuity purchase).

Meanwhile, Just is willing to pay 8.72 per cent (£8,720 a year) to anyone who has had a heart attack or is living with diabetes.

Do I have to pay tax on my pension?

Pensions are not tax-exempt, so if your total retirement income exceeds your tax-exempt personal benefits, you may be liable to pay taxes. Therefore, if you earn more than £12,571 a year from other sources of income, such as pensions or national pensions, you will pay income tax.

If your annual income is between £12,571 and £50,270, you will be taxed at 20 per cent. For income between £50,271 and £125,140, ​​the tax rate is 40%.

There are also exemptions. For example, if you buy an annuity with guaranteed payments for a certain number of years and die before the end of that period, taxes may not be an issue.

Here, if you die before you turn 75 and your remaining income under the guarantee goes to a loved one, that person won’t have to pay taxes on it. But if you die at age 75 or older, your loved one will have to pay income tax.