Out with the old...annuities

Friday, March 20, 2015

Out with the old...annuities

Under the outgoing system, you save into a workplace or private pension through your working life. At retirement, you're allowed to take up to 25 per cent of that pot of money in cash, tax-free; once you've done that, in most cases, the rest will be used to buy an annuity, which will pay a regular taxable income for the rest of your life.

The big problem is that traditional annuities are inflexible and poor value. Once you've bought one, in most cases you're stuck with it for life - you cannot change it for a better deal if rates improve, or a different product if your circumstances change.

Worse still, annuity rates are based on returns from government bonds, and these remain at very low levels. The income from the average annuity bought with a £100,000 pension pot fell to below £5,000 a year by the end of 2014, though rates may improve somewhat during 2015.

The alternative to an annuity is income drawdown, where you leave your money invested and take an income directly from it. That gives rather more flexibility - but the amount you can draw out each year is capped unless you have £12,000 a year of other secure income.

(This article was first published in A Place in the Sun Magazine.)

A Place In The Sun