What is annuity and what is the problem with them

What is an annuity and what is the problem with them

It used to be that when you reach retirement say 60 or 65 you’d buy an annuity. An annuity gives you a guaranteed income for the rest of your life. You can choose for this to increase with inflation and you can also choose for it to offer your spouse a pension if you pass away before then. However each Additional option adds to the cost of the fund needs to buy the annuity.

You buy an annuity with the funds that you have saved within your pension over the course of your lifetime. The bigger the fund you have the better annuity you can buy.

For decades this is how many people got their pension income and it works quite well however as people started to live longer the amount of funds needed to buy an annuity for the rest of your life got more more expensive.

Another problem with the annuity is that the money was spread evenly over the years between your retirement and the end of your life however a client who is in their 90s would spend a lot less than someone in their 60s or early 70s who wants to go on long haul holidays and days out.

For some this inflexibility became a major hindrance. For example you may have An individual who wants to take some money before they reach state pension age so they can retire early and with the annuity they wouldn’t be able to do that easily. This is where this is where pension freedoms introduced in mid 2010s came in and offered an alternative solution for people looking to retire on their own terms. More of that in another post.

These days people are increasingly using the pension freedoms rather than getting annuity. However an annuity is still available and suitable for some circumstances. Another option is Where someone swhen they reach later in retirement and their income is more settled than decide to buy annuity. Buying annuity later means that the client can get a better rate as they will have less years likely to live. You can also buy an annuity for a short period rather than the rest of your life.

And annuity is likely to remain an option for people for the for seeable future but it is increasingly likely that most people won’t use it until they reach at least their 70s.