Retirees taking an annuity at today's prices face some of the worst rates ever. So if you are about to take your pension, is there any way to escape the downward annuity-rate spiral?
Is now the worst time ever to retire?
This rather drastic description may apply, to some extent at least, if you are among the thousands of people who have to buy an annuity this year.
Annuities are the insurance products used to turn someone’s pension savings into a guaranteed monthly income for the rest of their life.
Rock Bottom
But a combination of economic and political factors has resulted in annuity rates falling to record low levels.Matthew Renier, director of retirement specialist Retire Right, says: "Taking an annuity at today's prices is one of the worst times in history to have to do so."
The payouts on annuities are linked to interest rates and yields on government bonds, or gilts.
The company which sells you an annuity will take your pension money and invest it in order to pay you the income you have been guaranteed.
But if it can't get a very good rate of return on its investment, this will be reflected in the rate you are offered.
No end in Sight
But since the credit crunch, interest rates and gilt yields in the UK and around the world have slumped.No recovery is expected for a few years at least.
Renier adds: "Low interest rates have forced annuity rates down for a number of years now, and they fell by around 10 per cent in the last three months of 2012 alone.
"And while there was a slight increase in January, low annuity rates are here to stay."
So if you are about to take your pension, is there any way for you to escape the downward annuity-rate spiral?
Here are your options:
Keep Working and Save More
If you are due to retire and take your pension in the next few months, there is always the option of carrying on working and trying to build up a larger fund.This means you wouldn’t have to buy an annuity now, and it would mean you'll probably have more money when you do so.
Also, the older you are when you buy an annuity, the better rate you'll get, as the seller will expect to have to make payments for a shorter period of time.
There are downsides, however. Firstly, you may not want to carry on working.
And while employers can no longer force staff to leave because of their age, you can be forcibly retired if your age means you can no longer carry out your duties.
Secondly, there is no guarantee that annuity rates will be any better in a year or two's time.
And your pension fund could also drop in value during this period if stock markets perform badly.
Go for the drawdown option
If you have a decent amount of pension saved up, you could consider income drawdown.This involves leaving your pension invested in shares and other assets in the hope that they continue to grow, while taking a regular income from it.
But this approach has its risks. Again, stock-market volatility could lead to falls in the size of your holding.
And unlike an annuity, your income is in no way guaranteed.
Drawdown is not something that should be entered into lightly.
If your pension is all you have to fund your retirement, and if it is not particularly large, there is a chance that drawdown will not be the right option for you.
Bite the bullet and buy now
Annuity rates might be bad at the moment, but they could be even worse in a year or two's time.If you delay your purchase, you risk getting an even worse return when you do come to buy.
And you will have missed out on the annuity income you would have received in the interim.
But there are a number of ways you can boost your annuity income, whenever you decide to buy.
One of the simplest is to shop around before you buy.
You can get an annuity from any company, not just the firm which runs your pension, and rates can vary significantly.
Also look at the type of annuity you buy.
If you have any health problems, let the seller know as this could entitle you to a higher-rate enhanced annuity based on lower life expectancy.
source: confused.com
