It has been speculated that annuity rates are set to rise due to the recent increase in gilt yields. This week the BBC revealed Aviva’s rate has changed: “for a man aged 65 and partner aged 60 with a joint pension pot of £100,000, the firm has increased its annuity by nearly £100 a year from £4,856 to £4,955 – a rise of 2%.”
Many consider this to be good news for those who have been saving towards their retirement and are looking to convert. If you are due to retire, and you are considering an annuity, whether single or joint, it is important to weigh up the pros and cons.
An annuity is simply a contract with a life insurance company where the money you have been paying into a pension scheme is exchanged for annual income. This income will last for the rest of your life, so the contract is based on how long you will live.
The amount you receive changes from person to person and will depend on a variety of factors, such as your heath and elements that may affect it, your age, where you live, and the amount you have saved. If you live a long life, an annuity can be a lucrative investment. However, if you were to pass away prematurely you would ultimately loose out.
There are different types of annuity available, including:
- Level annuity
- Percentage increasing annuity
- RPI-linked annuity
- Enhanced/impaired annuity
- Joint life annuity
It is imperative to shop around for the annuity that best suits you. Once you have signed with a provider, the decision cannot be reversed.
It has been speculated that this increase may tempt some into early retirement, whereas others may be hanging on to take advantage of possible further increases. Those opting for early retirement may, as suggested by the BBC, “be welcomed by some younger people struggling for work or promotion.”
There are of course alternatives to an annuity. If you were able to save a minimum of £250,000, you are eligible for a USP (unsecured pension). This option gives you control over your original fund as well as a regular income.
It is easy to get caught up in the news that annuity rates have now increased, considering the amount of online speculation leading up to it. But when it comes to obtaining financial security for your retirement, it is advisable to get all the information before making a decision.