Pension annuity rates ‘remain subdued’ despite strong fund performance – what can you do?

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Pension income can be received in many forms, with annuities providing one of the most commonly used methods. Annuities are essentially an insurance policy which gives the retiree guaranteed income for the rest of their life.

Annuities can be set up in multiple arrangements which can include:

  • Single life – paid exclusively to the pensioner, wither for life or for a fixed number of years
  • Joint life – payments will continue to a spouse or partner after the person dies
  • Fixed term – pays an income for a set number of years, then a guaranteed sum which can be invested or used to buy another annuity
  • Short term – stops paying at the end of a set number of years (up to a maximum of five) or when the person dies

There are many other different types of annuities but not matter what option a retiree goes for, they should remember that annuities are an instrument to be bought and as such, costs will need to be factored in.

If an annuity is bought, a person can still take up to 25 percent of their pension pot as tax fee cash and tax will be levied on the remaining 75 percent.

On top of this, annuity rates will need to be evaluated to work out if the asset will be worthwhile in the long term.

Unfortunately, new analysis from Moneyfacts revealed that while pension fund performance has improved in recent months, annuity rates have remained subdued.

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As they detailed: “The average annual standard annuity income for an individual aged 65 (based on a single life £10,000 level without guarantee annuity) increased by 0.7 percent in Q2 2020, meaning the average annuity income is still 5.3 percent lower than at the start of the year.

“The considerable upturn in pension fund performance and slight increase in annuity rates combined to boost the retirement incomes available to those saving into a personal pension and looking to annuitise.

“For example, an individual who had saved £100 gross per month into a personal pension for 20 years would have built up a final pension fund of £46,318.

“Using this to take an income through an annuity at age 65 means that they will now receive just £1,875 per annum, an increase of 12.7 percent on Q1 2020 when the average retirement income was at a historic low.

“Despite this increase, the average retirement income for those looking to secure an income from a pension pot through an annuity is still 11.9 percent lower than a year ago.”

How much a person can receive as income from an annuity is based on a number of factors.

The payments will/can be based on:

  • How much the person had in their pension pot when the annuity was bought
  • The retirees age
  • Whether they want the income to increase each year
  • Whether they want the annuity to pay out to someone after the die
  • The retirees health and lifestyle

According to Pension Wise, anyone seeking to take out an annuity should ask their provider if their pension pot has any special features that should result in them receiving a better deal, an example being a guaranteed annuity rate.

They should also ask their provider about the various types of annuities they offer and evaluate how much tax they’ll pay on the annuity income.

Customers should, just as with other financial products, shop around and compare providers to get the best deal possible.

Pension Wise provides a tool on their website which will estimate how much a person’s guaranteed income could be, which only requires information on how big a pension pot is and when the user expects to take the money.

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