The announcement that the income from a joint lives annuity will be tax-free for the survivor of a marriage or civil partnership has to some extent leveled the playing field between the retirement options of buying an annuity and drawing down income and capital from a pension pot. However, the flexibility and tax-efficiency now available through drawdown have made this the preferred option for many people, and the press has been quick to predict the demise of annuities.
But the situation is not black and white, and much depends on the age of the retiree. Annuities have the great advantage of providing a guaranteed lifetime income, so there is no risk of running out of money.
However, annuity rates are very low, and the younger the person is who is taking out the annuity, the poorer value the investment will provide. In particular, the rates available to 65 year-olds are a major disincentive.
So income drawdown is likely to be the immediate choice for younger retirees, though caution is required because if the drawings deplete the capital – perhaps exacerbated by a stockmarket setback – there can be no sure way of making up the shortfall.
The longer one can leave the purchase of an annuity, the better the rates will be; and current low interest rates (which dictate annuity rates) may not be with us for ever. So a prudent approach might be to consider moving to the safety of an annuity at or after the age of 75,
A further factor is that as age increases, so also does the possibility that health will deteriorate and that enhanced annuity rates will become available which take account of a potentially reduced life expectancy.
For most people, annuities will continue to have an important role in financial planning for retirement.
Duncan R Glassey
Senior Partner – Wealthflow LLP
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