10 April 2024
Deciding what you should do with your money in retirement is a complex decision. Annuities, which provide a guaranteed income for life have experienced a revival over the last year and are now being considered as part of a retirement strategy, when perhaps they weren’t before as much.
Currently, an annuity providing a healthy 67-year-old with a retirement income of £26,700 a year, would cost you approximately £475,800 [1]. In March 2023, you needed £643,000[2] to purchase an annuity providing the same income.
How annuity rates have changed:
| Fund Value | Annuity Rate | Gross Income | |
| Mar-23 | 643,000 | 4.15% | 26,700 |
| Sep-23 | 479,000 | 5.57% | 26,700 |
| Feb-24 | 475,800 | 5.61% | 26,700 |
Carla Morris said, “Annuities do look attractive at the moment. They provide you with a guaranteed income for life, no matter how long you live. From day one, you’ll know how much income you’re going to receive each year. Annuities offer certainty – and that may be particularly reassuring if you’re worried about the recent volatility in the stock market. On the flipside, annuities are inflexible – you can’t change your mind once you’ve bought an annuity and you can’t vary your income to reflect any changes in your circumstances.”
There are various different types of annuities. One of the downsides of some annuities, is that they can be more difficult to pass on after death. However, annuities with a guaranteed period will pass on to the beneficiaries if the individual dies within the fixed period of time. If the guaranteed payments are made to a spouse or a beneficiary at the annuity provider’s discretion there are no inheritance tax (IHT) implications. With pension drawdown, any of the pot not paid out on death could be passed to the next of kin, outside of the estate.
In the current high inflationary environment, annuity rates have increased because of their correlation with government bonds (gilts). Annuity scheme actuaries rely on the prevailing gilt yields for their risk-free expectations when assessing what rates to offer and higher interest rates increase the return on these assets.
Purchasing an annuity isn’t necessarily the right choice. Those contemplating their retirement options could also consider income drawdown, an alternative to purchasing an annuity.
Carla Morris said “Income drawdown is more flexible because you can adjust the amount and frequency of your withdrawals. Your pension remains invested, so your lump sum could grow over the long term in line with investment returns. However, there is a risk that your pension doesn’t last as long as you need it to – either because your investments don’t perform as well as you hoped or you withdraw too much money. It’s really important to ensure your pension is carefully invested and that you have a robust drawdown strategy in place.
The hybrid annuity and drawdown option You don’t have to commit to one strategy in retirement, having a balanced approach can be a sensible option. The table below highlights the different strategies and amounts you could receive.
| Age of Death | 85 | 87 | 95 | ||||||
| Pension Value | £100,000 | £500,000 | £1,000,000 | £100,000 | £500,000 | £1,000,000 | £100,000 | £500,000 | £1,000,000 |
| Annuity Only | £6,119 | £30,531 | £61,220 | £6,119 | £30,531 | £61,220 | £6,119 | £30,531 | £61,220 |
| Drawdown Only | £6,747 | £33,734 | £67,467 | £6,266 | £31,331 | £62,662 | £5,025 | £25,126 | £50,252 |
| 50/50 Approach | £6,433 | £32,132 | £64,244 | £6,193 | £30,931 | £61,941 | £5,572 | £27,828 | £55,736 |
Source[3]
Carla Morris said, “Annuity rates have increased so it may be that for some people, using part of your pension pot to purchase an annuity, which gives you a guaranteed income for life, is a good idea. Another option is a 50/50 approach where you could purchase an annuity, providing you with a guaranteed income to cover your bills or outgoings, whilst retaining an invested element to help meet further expenses. Passing down pension pots is now a popular choice, in most cases pensions can be passed outside of your estate and won’t be subject to IHT, however it is important to ensure that your income needs are met first.”
One of the benefits and draw backs of annuities is that you get a guaranteed income, but over time higher inflation will eat into this income. Index-linked/escalating annuities can be purchased which increase over time and off-set the impact of inflation on retirement income.
Carla Morris warned, “Making the right decision for your retirement can be daunting, with many different options. But sitting down with a financial adviser can help you to stay focused on what you want to achieve with your pension pot and minimise the worry, allowing you to step into retirement with an informed and realistic plan.
-ENDS-
Disclaimers
The value of investments, and any income from them, can fall and you may get back less than you invested. This does not constitute tax or legal advice. Tax treatment depends on the individual circumstances of each client and may be subject to change in the future. Neither simulated nor actual past performance are reliable indicators of future performance. Performance is quoted before charges which will reduce illustrated performance. Information is provided only as an example and is not a recommendation to pursue a particular strategy. Information contained in this document is believed to be reliable and accurate, but without further investigation cannot be warranted as to accuracy or completeness.
RBC Brewin Dolphin is a trading name of Brewin Dolphin Limited. Brewin Dolphin Limited is authorised and regulated by the Financial Conduct Authority (Financial Services Register reference number 124444) and regulated in Jersey by the Financial Services Commission. Registered Office: 12 Smithfield Street, London, EC1A 9BD. Registered in England and Wales company number: 2135876. VAT number: GB 690 8994 69.
PRESS INFORMATION
For further information, please contact:
Richard Janes richard.janes@brewin.co.uk / Tel: +44 (0) 20 3201 3343
Siân Robertson: Sian.Robertson@brewin.co.uk / Tel: +44 (0) 20 3201 3026
Payal Nair payal.nair@brewin.co.uk / Tel: +44 (0) 20 3201 3342
NOTES TO EDITORS
About RBC Brewin Dolphin
RBC Brewin Dolphin is one of the UK and Ireland’s leading wealth managers and traces its origins back to 1762. With £51.8* billion in assets under management, we offer award-winning, personalised wealth management services from bespoke, discretionary investment management to retirement planning and tax-efficient investing.
Our qualified investment managers and financial planners are based in 33 offices across the UK, Jersey and Republic of Ireland. They are committed to the most exacting standards of client service, with long-term thinking and absolute focus on our clients’ needs at the core.
As part of Royal Bank of Canada (RBC), we are now able to draw on the strength of a global financial institution to continue to improve the service we provide to our clients and drive further innovation across our business.
*as at 31st October 2023.
About RBC
Royal Bank of Canada is a global financial institution with a purpose-driven, principles-led approach to delivering leading performance. Our success comes from the 94,000+ employees who leverage their imaginations and insights to bring our vision, values and strategy to life so we can help our clients thrive and communities prosper. As Canada’s biggest bank and one of the largest in the world, based on market capitalization, we have a diversified business model with a focus on innovation and providing exceptional experiences to our more than 17 million clients in Canada, the U.S. and 27 other countries. Learn more at rbc.com.
We are proud to support a broad range of community initiatives through donations, community investments and employee volunteer activities. See how at rbc.com/community-social-impact.
[1] Annuity quote from Iris The Exchange on quoted on a gross basis and with a 2% escalation rate. February 2024
[2] Annuities from Iris The Exchange on quoted on a gross basis and with a 2% escalation rate. March 2023.
[3] RBC Brewin Dolphin and annuities from Iris The Exchange are quoted on a gross basis and with a 2% escalation rate.
*Annuity assumptions: single life, monthly in advance, no guarantee period, non-smoker, standard (healthy) rates, 2% indexation, payable for life. Quotes obtained from Iris March 2024
* Drawdown assumptions: income assumed to be withdrawn in full at the start of each year. Income increases annually with inflation (assumed 2%). 5% investment return after charges, applied consistently. Capital depleted to NIL value.