So what’s the fuss about annuities?
You may have come across yet more media coverage in relation to rip-off financial services. The story, like most has some truth to it, but some… well let’s just call a spade a spade…inflammatory errors. Here I shall attempt to briefly convey what the fuss is about in relation to annuities.
What is an annuity?
First off, what is an annuity? In short, its an income paid for life, most of the time paid like income (and taxable) every month. You can choose for it to stay the same (level) or rise each year (to keep pace with inflation). You effectively buy an annuity with your pension fund.
Are you getting a bad annuity deal?
Easy enough so far… so what’s the fuss about? In short, most people don’t shop around for the best deal in the belief that they wouldn’t get much more, or simply didn’t know they could. As a result many or most buy their annuity from the company their pension is with. In most instances they aren’t getting the best deal or anything like it.
The main problem with buying an annuity is that you make your decision and have to stick with it for the rest of your life. It’s a one time deal. So any decent adviser will help you to think about the income you want well in advance of the day you decide. A financial planner will do this from the start (not just before you retire). So good planning is planning ahead and figuring out how best to tale your income and when, pensions and annuities are simply part of the picture, not the entire story.
There’s not much between them right?… wrong!
Is there really much difference? Yes. There is a massive difference. This will depend on how old you are, where you live, your life expectancy and your state of health. Bizarrely, the worse your health the better the annuity (as the annuity company won’t expect to pay it out for as long as someone with good health). Getting this part right alone could increase the income by 20%-50%. The message here is to shop around… however the reality is that this isn’t the whole truth, you really ought to use an IFA to do the shopping and set something up having discussed all of the options properly… in-line with your requirements and expectations about the future.
Planning ahead, understanding the bells and whistles
The bells and whistles… when you die the annuity stops. However you can have it pay in full or part to your spouse or your estate, you can put in guarantees. You can mix and match. You can delay. There are lots of things to think about and an IFA will do this, for a fee. This is money well spent and ultimately, if things go wrong the IFA is responsible for the advice (unlike a journalist or doing it yourself). The really important thing is to be engaged in the process and thinking about what you want your lifestyle to be in the future, when you do eventually get to the point when you can decide if you want to work or not.
One trick pony?
Annuities have their problems for sure and there are other options, but I wont drone on any longer. You give yourself more options by seeking independent advice from a financial planner, who will work to keep as many options open for you as possible (and sensible).
Please send me your questions!
That wasn’t so bad was it… any questions?
Dominic Thomas: Solomons IFA