For many years, annuities have not been the first choice when planning for income in retirement. However, as annuity rates have improved, I have noticed more clients asking whether they could or should play a role in their retirement plans.
One of the most common questions I hear from clients approaching retirement is not “How can I get the highest return?” but “Will my money last?”
After years of saving and investing, many people find that their focus begins to change. Rather than concentrating solely on growing their pension, they start thinking about how to create certainty around their future income.
This is where annuities should form an important part of the retirement planning conversation.
What is an annuity?
An annuity allows you to exchange some or all of your pension savings for a guaranteed income. Depending on the options selected, that income can continue for the rest of your life, regardless of what happens in investment markets.
For many years, annuities were often overlooked, as low gilt yields resulted in relatively modest income levels. However, the rise in gilt yields in recent years has improved annuity rates significantly, resulting in annuities becoming a more prominent part of the retirement planning conversation alongside other retirement income options.
Why can retirement feel different to saving for retirement?
During our working lives, market fluctuations are often viewed as part of long-term investing. We have time on our side and the opportunity to continue contributing to pensions and investments.
Retirement can feel different. Once we stop working, our savings often become the source of our income. This can make market volatility feel much more personal, particularly if income continues to be withdrawn while investment values are falling.
One of the most common concerns I hear from clients is not necessarily whether markets will fall, but whether they will fall at exactly the wrong time – just as they start relying on their pension to provide an income.
How can an annuity help?
For some, a guaranteed income can provide valuable reassurance. Essential spending, such as household bills and day-to-day living costs, can often be matched against secure sources of income, including the State Pension and, where appropriate, an annuity. This can reduce reliance on investment performance (market risk) to meet ongoing spending needs.
In simple terms, an annuity helps transfer certain risks away by providing a known level of income regardless of market conditions.
Does it have to be an either-or decision?
One misconception about retirement planning is that people must choose between an annuity and keeping their pension invested in drawdown. In reality, people often use a combination of both. Secure income sources can help cover essential expenditure, whilst invested pensions can provide flexibility and the potential for future growth.
This blended approach can provide a balance between certainty and flexibility.
What do other people do?
This is a question I am frequently asked.
The answer depends on health, spending needs, family circumstances and attitude to risk. However, many of my clients share a common objective: reducing uncertainty.
For some, that means using an annuity to create a secure foundation of income. For others, maintaining flexibility is the priority. More often than not, the answer lies somewhere in between.
A reminder about perspective
As with many areas of financial planning, there is rarely a one-size-fits-all solution.
The plan is not necessarily to maximise investment returns or eliminate every possible risk. Instead, it is about building a retirement plan that reflects your personal circumstances and attitude to risk.
If you would like to review your retirement income options and understand whether an annuity could have a role within your wider financial plan, please do not hesitate to contact me at Wingate Financial Planning.
