With the war raging in Ukraine sending energy prices soaring and depressing stock markets worldwide, and inflation rising to a 40-year high in the UK at 9.1% in June, investors seeking guaranteed income from their portfolios are finding things difficult at the moment.
With interest rates starting to rise, the returns from bank and building society deposits and National Savings are beginning to edge up, but only slowly and modestly.
So what other guaranteed income plans are available? Annuities.
Traditional annuities
Until 1995 when an investor wanted to cash in their personal pension, there was only one option – mandatory annuity purchase.
The very word annuity sounds old fashioned these days and following the fall in annuity rates after the financial crisis of 2008/09, and legislative changes between 1995 and 2015 creating alternatives to annuity purchase in the form of Income Drawdown and Flexi Access Drawdown Plans, the traditional annuity was perceived as poor value and inflexible.
Traditional annuities generally stopped paying out when you died although you could pay extra for a minimum guaranteed payment period.
They were therefore regarded not only as inflexible and poor value but also as a “rip off” as if the investor died early the annuity provider “pocketed” the residual funds.
Consequently, traditional annuities fell right out of favour.
Modern annuities
Annuity providers have fought back and over the last few years have introduced a new generation of annuities offering both guarantees and flexibility.
Whereas traditional annuity rates used to be very simplistically based only on age and gender, they are now quite rightly underwritten taking into account age, medical history and social factors such as occupation (previous) and postcode. This offers better value for many clients.
There are now annuities that can be purchased to cover a fixed period of time offering a guaranteed income during that period and a guaranteed return at the end of the period or on earlier death.
If you are suffering from any life-threatening health conditions then enhanced annuities may be available to you. These pay out a higher rate than a standard annuity as your life expectancy may be lower than average.
Additionally, there are a number of hybrid plans available in the market linking in with the new generation of pension contracts and offering all kinds of different guarantees and payment periods.
How much might I get from an annuity?
There are numerous variables and permutations to take into account and every client’s requirements will be different.
Currently, standard annuity rates at the moment start at 6.34% for a 65-year-old, 7.14% for a 70-year-old and 8.53% for a 75-year-old.
Whilst annuities will not be suitable for everyone or for all of a client’s cash, with the cost of living crisis and concerns about how bills are going to be paid It may be very timely to re-visit annuities.
This article should not be construed as a personalised recommendation. The most suitable solution for you will depend on your own personal circumstances. No action should be taken without seeking further formal advice.
MHA Moore and Smalley is the trading name of Moore and Smalley LLP. Moore and Smalley LLP is regulated by the Financial Conduct Authority, FCA registration number 448716.
