The Annuity Question

The Annuity Question

by David Redmond on 20 Jan, 2011

Choosing an annuity is one of the biggest financial decisions you will ever make in your life. Now that the government has relaxed the rules on compulsory annuities an even bigger choice has come into play: whether to get an annuity at all.

Of course, the option not to get an annuity is only applicable to those who can prove they will have an annual income greater than £20,000, which cuts out most of the population. However, it is a factor worth considering when deciding how best to save for retirement as it opens up the very real possibility of not touching a pension fund at all, but building up a retirement fund through various savings and investment strategies.

Although annuities are good for ensuring a guaranteed income for the rest of your life, the loss of control means that once you start receiving payouts there is no way of growing the money. It also means there is often no way to transfer the rest of the fund to your relatives once you’ve passed on. If you can build up a large enough fund to avoid it, you can continue to invest the money however you please and know that you can leave the remainder as inheritance.

That being said, you would have to be very confident that you can stretch your money out for the rest of your life, something which you don’t have to worry about with an annuity.

Most people will of course get an annuity, but even then there is an important choice to be made. Many people don’t realise that they can get an annuity from someone other than their pension provider, and where you get your annuity can make a huge difference as to how much money you receive. Considering how much people will usually shop around for financial products it is surprising how little people do when it comes to possibly the biggest financial decision they will ever make, and the one that can only be made once.

The final consideration is when to start taking an annuity out. Of course the later you start taking it out, the higher your payments, as it will be assumed that the fund doesn’t have to stretch as long. However, that means you are less likely to receive the full fund, which seems a shame as you will have spent a great deal of your life building it up.

When it comes to choosing an annuity the advice is much the same as with anything else: don’t take the first offer, do your research, and only commit when you’re sure you’ve got the best deal.

About the Author

David Redmond


David Redmond is a Partner of Don Gilliard Finance Group. He is a fee-only, independent financial advisor and financial planner. For over 15 years, he has been helping individual investors and their families realize their investment goals.