Why I’m Glad I Bought An Annuity Despite Forthcoming Changes to Pensions

Written by Karen Bryan

4coinsDespite the forthcoming changes to UK pensions which will allow you to take your whole pension pot as cash (subject to income tax after the 25% tax-free lump sum has been taken), I used my personal pension pot to buy an annuity (an income for life) as soon as I was 55 earlier this year. As it’s a big decision to take, which can’t be reversed, I did a lot of research and consulted an online independent financial adviser. I’m happy with my decision, below are the reasons why.

It’s Great to Have a Guaranteed Income for Life

Being self-employed, my earnings can fluctuate, so it’s great to know that I have a guaranteed income for the rest of my life. I bought an index-linked annuity, which means that my income will go up by the rate of inflation (RPI) every year. It was very tempting to go for a level annuity, which pays out the same amount every year, as the initial payment was more than 60% higher. But then I thought what if inflation is high, the income from the annuity could be almost worthless in thirty years time, when I may not be able to work to top up my income.

For me, saving into a pension was about securing a steady income which will maintain its spending power throughout the remainder of my life.

I’m No Longer Paying into a Pension

My annual payments into my pension pot were eating up a fair proportion of my income.  Now not only do I have a guaranteed income, but my outgoings have dropped. If I want to keep saving, I can use a more flexible tax-free new Cash ISA (NISA), which now has an annual limit of £15,000.

I Don’t Have to Monitor My Pension Pot

I’d set a target for the size of my pension pot by my 55th birthday. I’d exceeded the target set for the value of my pension pot by 10% a few months prior my 55th birthday. Now this was down to luck, in that the stock market grew steadily when my pension pot was at its biggest.

I’d read a few reports suggesting that stock market growth was unlikely to be sustainable. I thought it wise to lock in my gains by de-risking my pension pot i.e.moving it to safer investments. I found it quite nerve-wracking watching the ups and downs in the value of my pension pot and trying to decide when to shift into cash funds.

Between a pathetically low rate of interest and fund charges, my pension pot lost almost 1% in value over the months in the run up to my 55th birthday. I could have earned a higher rate of interest, with no charges, in an instant access savings account, but I was forced to keep the cash in a pension fund.

As things turned out, I could have had a slightly larger pension pot if I’d kept my pension pot in stock market related units, as stock market growth continued. However, I don’t regret my decision. It’s very easy to be greedy and get lured into potential gains and possibly lose current gains.

If I’d decided not to buy an annuity, I wouldn’t have been keen to leave the pension pot invested in stock market related units. Although that option has the highest potential growth, there’s also the risk of loss. I’d like to see an index linked pension fund, which would at least retain the spending power of your pension pot.

I’d also have been unsure how much to withdraw as income from the pension pot each year. If I withdrew too much, I’d risk not having enough left in the pot if I live for longer. If I withdrew too little, I wouldn’t get the full benefit of my pension savings.

Conclusion

Whilst consulting an independent financial adviser is useful in that they can illustrate all the options, you still have to make, and live with, the decision to buy an annuity.

Despite being fairly knowledgeable and interested in personal finance, I found the whole process complex and confusing. There are so many unknowns, e.g could the state pension be means tested in the future, how long will you live and the future rate of inflation.