Income Option - alternatives to a conventional lifetime annuity
Before selecting a conventional lifetime annuity you may wish to consider some of the alternative products that are available. It will help you in this comparison if you have a good idea of the “shape” of conventional lifetime annuity that you might choose.
You might consider alternatives to conventional lifetime annuities for 2 main reasons:-
- You would prefer your pension savings to remain invested so that you may have the possibility of a higher initial pension or a rising income over the longer term.
- You have an expectation that conventional lifetime annuity rates will rise in future; you may wish to avoid locking into a rate now and/or you believe that your health will deteriorate and that you may qualify for enhanced terms.
There are three main alternatives that you might use to address these issues.
- Investment backed annuities come in several different forms, but the common theme is that they offer an opportunity to secure an income that may increase by investing in investment funds. Unlike conventional annuities, investment backed annuities contain an element of investment risk; your income may go down as well as up.
- Fixed term annuities enable you to delay the decision to purchase a conventional lifetime annuity. With a fixed term annuity you buy a guaranteed income for a set period only (the minimum term is 3 years). At the end of the set period a guaranteed maturity fund is paid and you can choose to purchase either another fixed term annuity or a conventional lifetime annuity. By delaying the purchase of a conventional lifetime annuity through the use of a fixed term annuity, annuity rates may improve which means you can secure a higher lifetime annuity, but rates may also worsen resulting in lower levels of income.
- Pension drawdown has virtually none of the features or guarantees of a conventional lifetime annuity and as such is the most different of all the alternatives. It also carries investment risk as your funds remain invested in your chosen investments. Pension Drawdown can be further divided into Capped or Flexible Drawdown.
A short summary of the different options is shown in the following table.