These annuities have some or all of their income payments linked to the performance of the stock market. The income they pay out would be set up front but then reviewed on a regular basis, usually every three or five years. As this review is subject to how investments have performed, that income could then increase but might also decrease.
Some of these annuities have underlying guarantees which will provide at least a minimum level of income regardless of stock markets – but check the details to see what assumptions are being made about markets and whether your attitude to risk is in line with their terms.
The average life expectancy for a male aged 65 is just over 83 years old. However, if you have certain lifestyle habits or medical conditions which mean your own life expectancy is going to be less than this, an enhanced annuity could increase the income available to you – or reduce the amount you need to pay if your required income is fixed.
That difference could be significant, so it is worth having the conversation about medical history and lifestyle with your adviser when looking for the best rate.
Fixed term annuities pay you a guaranteed income with many of the above options available but only for a fixed period of time – usually between 1 and 10 years. This allows you to take an income from your money now but receive a cash lump sum back later which will allow you to shop around again for what might then be a better rate.
These annuities can be attractive if you believe, for example, interest rates will go up significantly or your health will deteriorate and open up the chance to get an enhancement.
However, be careful to check all the details of your expected income and lump sum, particularly for shorter terms. Charges for using the flexibility of such products need to be weighted up against the potential reduction in income that may be experienced if there are no changes in circumstances between now and the end of the fixed term.
Following the introduction of Pension Reform, we believe it is likely that annuities will develop further over the coming months and years. For example, in the US, there is fairly widespread use of deferred annuities and in the UK, talk of products which bring the annuity benefit of longevity insurance into line with some of the wider pension Reform flexibility. We will keep you updated on developments as we hear more but please do get in touch if you have any specific questions around your own situation.
When you take out your annuity, you can opt to include a minimum guarantee so that, even if you die early, at least a minimum amount of the original capital will be returned to your estate.
Such guarantees range from as little as one year to as many as ten years and will ensure your estate receives the balance between income you have received and the equivalent amount that would have been due over that guarantee period.
Single Life Versus Joint Life
A single life annuity pays you an income for the rest of your life but then stops and will pay nothing more after death. If you are married or in a civil partnership, this could mean you risk leaving you partner without income in the event that you die first.
If this is the case, you may prefer a joint life annuity. This will keep paying out at least a percentage of the income if they live longer than you do. This percentage can range from perhaps 25% to 100% and will ensure that they can rely on at least some income even if you are no longer there to provide it yourself.
There is no doubt that income drawdown can be a complicated area of financial planning and one where a bit of professional help can prevent you making some potentially costly mistakes. At A&J Wealth, we have both the experience of the market and of the investment options availbale to help you avoid these mistakes and set yourself up for the comfortable retirement you deserve.
Consequently, if this is an area of interest for you, or you are simply looking to ask questions about it, please do not hesitate to get in touch.
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