18th July 2013
There has been good news on the annuity front as rates have risen by 5.6% since December 2012. Longer term the picture is not as bright as the rate has fallen by 15% in the last three years according to the latest MGM Advantage Annuity Index. This means that people will have needed to have set aside a significantly greater amount than three years ago. The pensions firm estimates this amount at around 24% more to buy the same income as three years ago.
Aston Goodey, marketing director at MGM Advantage says: “Although the recent news is good, annuity rates have only recovered the ground lost in the second half of 2012. We are also not even close to the rates seen even just three years ago, meaning people approaching retirement will face some difficult decisions.”
“There is a sting in the tail for people looking to generate an income in retirement from an annuity. You will need to have a pension pot worth 24% more than someone who retired three years ago to generate the same income.”
The firm says that a low return on gilts and bonds, improving life expectancy and various regulatory pressures mean insurers will have to hold more capital. They suggest that rates will not return to the sort of levels seen just a few years ago. One more positive note is that the number of pension providers offering enhanced annuities to people with health issues is increasing and this could mean more is offered for this product.
In the meantime MGM Advantage has set out the following tips for maximising retirement income but also making sure that your plans are working in the way you want them to.
1. Look at all of your options at retirement, rather than simply the annuity on offer from your pension provider, for example the range of investment-linked annuities now available – as little as a 3% investment return is required to match the income on the best conventional annuity rate.
2. Think about your partner and family, considering whether to provide for them when you die through a guaranteed period of payment past your death or joint-life annuity.
3. Consider how long you will enjoy retirement, and think about how your spending pattern will change over that time along with how inflation might affect your income.
4. Always exercise your right to shop around for the best annuity rate, the difference can be as much as 30% or more.
5. Consider whether you might qualify for a better rate because you qualify for medical or lifestyle conditions because up to 70% of people who retire do qualify.
6. Consider if you could take income in phases rather than all at once. This leaves some money invested for longer to grow and gives some flexibility around what choices you make in future
7. Seek professional financial advice to ensure you choose the best option or options for your need.
Mindful Money would add another tip to the firm’s seven. If at all possible start planning what you want to do for retirement at least five years before think you may want to retire. And remember that retirement age is changing. The default retirement age, when an employer could require you to retire has been abolished while the age at which you could receive the state pension is increasing surely but steadily.
You can’t plan everything, and certainly not what markets or annuity prices will do, but the earlier you start to look at the things the you can control the better.