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Why shouldn’t I invest my pension money in an annuity?

We have seen that simply putting your money into cash is not an option. But what about an annuity? Wouldn’t it just make life easier to buy an annuity and be done with it?

Annuities can offer many advantages. They are guaranteed to pay a given income until you die and this income can, if you choose, rise each year in line with inflation and be paid to your spouse after your death.

Annuities also involve no trouble in later life: you buy one, perhaps at retirement age, and then simply receive the income every month. Choosing the right annuity involves some research, but once you have bought it there is nothing more to do.

Our portfolios, by contrast, will need monitoring and sometimes changing – things that are likely to become more troublesome as you age.

We should acknowledge that there is sometimes a place for buying an annuity when you retire and that you might want to at least consider them at this point. In particular, those with impaired life expectancy because of health conditions or lifestyle choices such as smoking may be offered annuity rates sufficiently good to make them worthwhile.

But for most people, the incomes offered by annuities at the point of retirement are simply too low at present. For example, if you want annual increases in your income and for your spouse to benefit if you die, the most you will receive at the time of writing is an annuity rate of 3.2% at age 65, which would mean £9,600 a year from a £300,000 pension pot.

This income of £9,600 from an annuity is unlikely to be enough for you to live on, even with the state pension on top.

In the later stages of retirement we believe that annuities have a key role to play for many, as we will explain in Step 5, so we do not disregard them completely.

<< Back to: Step 3: What to invest your pension in

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