Should I buy an annuity with my pension?
A pension annuity is a financial product which provides you a guaranteed fixed income stream for life, which you can buy when you retire with your pension savings.
But how do they work, what are the benefits of having one and are there any drawbacks to using this option as opposed to relying on your pension. We’ve put together a helpful FAQ guide to help provide more insights into annuities.
How do pension annuities work?
It’s probably best to think of a pension annuity as a swap.
When you choose to retire, you will have a pot of money saved up in your pension plan. You can then decide to use some, or all, of this money to purchase (or swap it for) a pension annuity.
There are various annuity options available, with some offering a fixed income amount throughout your retirement, and others that tie the income to investment performance.
The provider will then use your savings to calculate a guaranteed, regular, income payment. This income will then be secure for the rest of your life, allowing you to relax in the knowledge that you have a regular income stream, as well as allow you to plan and budget for the future.
It’s like having your own personal pension plan, but without the responsibility of managing investments.
What are the benefits of pension annuities?
There are many benefits that come with using a pension annuity. One of the main ones being that it can offer protection against rising inflation. If you pick an annuity which offers inflation linked increases, your income will keep pace with the rising living costs, allowing your purchasing power to be maintained.
Also, depending on which annuity you choose, it may also pay out to your family if you pass away before a set period.
Is there anything I need to be aware of?
Whilst having a regular income stream might sound like a perfect solution as you head into retirement, it’s important to check whether it’s the best plan for you.
For those who have a high-risk tolerance, they might be disappointed with the lower returns that annuities offer over other investment options.
Also, should you need to, accessing your full lump sum might be difficult to do, or could come with penalties which would end up costing you money.
I’d be interested to learn more, what should be my first steps?
If you think it might be something you’d want to investigate further, we recommend researching the market first.
Different providers will offer different rates, options and benefits. You will then be able to pick one that best suits your needs.
Speak to a Wealth Expert
If you have any questions about saving for retirement and making the most of your pensions, our team of Wealth Experts can offer you their insights and specialist advice. Get in touch with one of our team to discuss further how we can help.
