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Millions of retirees could be overlooking the benefits of annuities, research suggests

The number of retirees choosing an annuity to generate an income is on the rise. Yet, research suggests millions of people may be overlooking the option because they don’t understand how annuities work.

An annuity could provide you with a way to create a guaranteed income throughout retirement. It’s something that you purchase, and it will then pay out a regular income. Given rising inflation and investment volatility over the last couple of years, it’s not surprising that some retirees find annuities to be an attractive option.

According to statistics from the Association of British Insurers (ABI), annuity sales soared by 22% in the first three months of 2023 compared to the same period in 2022.

However, a separate survey indicates some retirees may be disregarding annuities even though it could be an option that’s right for them.

19 million over-50s could be overlooking annuities

A survey conducted by the Financial Services Compensation Scheme (FSCS) found that just 10% of over-50s are willing to take risks with their money. Yet, despite an annuity providing a guaranteed income, just 28% said they either have one or would consider buying one.

Alternatives to annuities could mean your retirement savings are exposed to investment volatility. So, for risk-averse retirees, annuities may be an option to consider. The FSCS estimates that 19 million over-50s could be overlooking annuities.

Annuities could alleviate some of the key concerns those nearing retirement have.

37% of people that are unwilling to take risks say they worry about not having enough money to last the duration of their retirement. A guaranteed income could ease financial concerns for some people and help them enjoy the next chapter of their life.

Misunderstandings may be to blame for some over-50s disregarding annuities.

• 25% of survey participants said they didn’t understand how annuities worked.
• 26% said they worried a provider would go bust. However, UK-regulated insurers are protected by the FSCS, so retirees would usually still receive an income if this happened.

Annuities could form a valuable part of your retirement income, but you need to weigh up the pros and cons to understand what’s right for you.

The pros and cons of annuities you need to know

3 key benefits of annuities

1. They provide a guaranteed income

One of the potential benefits of annuities is that they provide a guaranteed income. So, you may feel less concerned about running out of money in your later years. For some retirees, this could provide peace of mind.

2. It is possible to link your income to inflation

When you’re selecting an annuity, you can choose one that will provide an income that would increase each year in line with inflation. As the cost of living is likely to increase during your retirement, a static income would gradually buy less and less. An income that’s linked to inflation may help preserve your spending power.

3. They could provide an income for your partner

If you’re doing your retirement planning as a couple, you may also choose an annuity that would continue to provide an income after you pass away. It’s a step that may ensure the long-term financial security of both you and your partner.

3 potential drawbacks of annuities

1. They are less flexible than alternative options

Compared to some options, an annuity is less flexible. For instance, if you choose flexi-access drawdown, you could increase or decrease the income you take based on your needs. An annuity will provide a regular income, but if you wanted flexibility, you’d need to use other assets to do this.

2. You wouldn’t benefit from potential investment returns

As you’ll use your savings to purchase an annuity, the money won’t remain invested as it may with other options. While this means you’re not exposed to investment volatility, you also wouldn’t benefit from potential returns either. If growing your wealth is part of your retirement plan, an alternative may be better suited to you.

3. Some annuities may have high fees

Annuities may come with higher fees when compared to alternatives. However, fees can vary between providers, so understanding the potential costs is crucial when you’re weighing up the different options.

A financial plan could help you create a retirement income that suits you

There are several ways to access your pension and you can choose to mix and match the different options. So, understanding your retirement goals and what suits you is crucial. As financial planners, we can work with you to put together a retirement plan that’s right for you.

Please note:

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.

Investing 101: What you need to know about tax efficiency and your investment options

Investing may provide a useful way to grow your wealth, but getting started can be overwhelming. There are some important decisions to make when investing that could affect the outcomes and the tax you’re liable for, and we’re here to offer support.

Last month, you read about investment risk and what to consider when creating a risk profile. Now, read on to discover what your options are if you’re ready to start investing.

Shares v funds: What’s the difference?

Investing is filled with terms that can seem confusing. When you’ve looked at investing, you may have come across options like investing in shares or through a fund.

You may want to consider both options and understanding the differences is important.

Shares

When you purchase a share, you’re investing in a single company. When you hold a share, you essentially own a very small portion of the business. You can then sell the share at a later date and, hopefully, make a profit.

The value of shares is affected by demand. A whole range of factors can affect demand, from company performance and long-term plans to global economic conditions.

If you purchase shares, you’re in control and can decide which companies to invest in and when to sell them.

It’s normal for the value of shares to fluctuate, even daily. It can be tempting to try and time the market by buying when the price of a share is low and selling when it’s high. However, consistently timing the market is impossible. For most investors, buying shares to hold them for the long term often makes sense.

Funds

A fund pools together your money with that of other investors. This money is then used to purchase shares in a range of companies.

A fund is managed on behalf of investors. So, you wouldn’t make decisions about which companies to invest in or when to buy or sell shares.

There are lots of funds to choose from, so you can select an option that suits your risk profile and goals.

Funds can be a useful way to ensure your investments are diversified. As your money is spread across many companies, it can help create balance. When one company performs poorly, the success of another could balance this out. So, the value of your investment in a fund may be less volatile than individual shares.

However, the value of your investment will still rise and fall, and investing with a long-term plan is often advisable.

2 tax-efficient ways to invest and reduce your potential tax bill

When you sell certain assets and make a profit, you could be liable for Capital Gains Tax (CGT). This includes investments that aren’t held in a tax-efficient wrapper.

For the 2023/24 tax year, individuals can make £6,000 of gains before CGT is due – this is known as the “annual exempt amount”. If profits from the sale of all liable assets exceed this threshold, you could face a CGT bill. In 2024/25, the annual exempt amount will fall to £3,000.

The rate of CGT depends on your other income, but when selling investments, it can be as high as 20%. So, CGT may significantly affect your profits.

The good news is that there are tax-efficient ways to invest that could reduce your bill, including these two:

1. Invest through a Stocks and Shares ISA

ISAs provide a tax-efficient way to save and invest. For the 2023/24 tax year, you can add up to £20,000 to ISAs. The returns made on investments held in a Stocks and Shares ISA are not liable for CGT.

There are many ISAs to choose from. They can hold shares or you can invest in a fund through one. Usually, you can access your investments that are held in an ISA when you choose.

2. Use your pension to invest for the long term

If you’re investing with your long-term wealth in mind, you may want to consider pensions. Pensions are tax-efficient for two reasons.

• First, you could claim tax relief on the contributions you make. This provides a boost to your contributions, which may grow further too, as tax relief would be invested alongside other deposits.
• Second, your investment returns are not liable for CGT when held in a pension. Instead, you could pay Income Tax when you start to access your pension once you reach retirement age.

In 2023/24, you can usually add up to £60,000 (up to 100% of your annual earnings) into a pension while retaining tax relief – this is known as your “Annual Allowance”.

If you are a high earner or have taken an income from your pension already, your Annual Allowance may be lower. Please contact us if you’re not sure how much you can tax-efficiently save into a pension.

Before you start investing in a pension, one key thing to consider is when you’ll want to access the money. Usually, you cannot make withdrawals from your pension until you are 55, rising to 57 in 2028. So, your goals and other assets should play a role in deciding if investing more into a pension is right for you.

Contact us if you have questions about your investment portfolio

We can work with you to create an investment portfolio that suits your risk profile and goals. We’re also on hand to answer any questions you may have, from deciphering financial jargon to explaining tax-efficient options. Please contact us to arrange a meeting to talk about your investments.

Once you’ve set up an investment portfolio, how often should you review the performance? Why is ongoing advice useful? Read our blog next month to learn about managing investments on an ongoing basis.

Please note:

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

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Retirees, don’t overlook the surprising risk of underspending in retirement

Spending too much money in retirement is a common fear. Yet, some retirees struggle with the opposite challenge – they spend too little. Read on to find out why and what you can do if you’re too frugal in retirement.

Underspending once you give up work may be more common than you think. It’s easy to see why some retirees adopt this approach. As many retirees are responsible for managing their income and ensuring it lasts, there is a real danger of overspending and facing a shortfall in your later years.

In fact, interactive investor’s The Great British Retirement Survey found 40% of retirees worry about running out of money.

However, underspending can be dangerous in a different way. It could mean you don’t get the most out of your retirement despite working hard to achieve financial security later in life.

Striking a balance to sustainably use your assets in retirement is just as much about your mindset as it is about wealth.

Switching from a saving to a spending mindset

One of the key challenges for some retirees is that they need to change how they view and use money when they enter retirement.

For decades, you may have prioritised building your wealth. From adding to an investment portfolio to contributing to a pension, a saving mindset may have been important to reach your goals.

However, many people start to deplete the assets they’ve built up in retirement. Even though you’ve diligently saved so you can use your assets now, it can be difficult to switch to a spending mindset. After all, you may have developed positive saving habits over the years that are difficult to break.

You may also have heard of “rules” about using your wealth that could curb your spending.

Perhaps you’ve read that you shouldn’t withdraw more than 4% each year from your pension. While this may be a useful guide, keep in mind that what is a sustainable income for you will depend on a whole range of factors, from the age you retire to other assets you may have.

So, creating a plan that’s tailored to you can give you the confidence to enjoy your retirement while considering long-term security.

4 reasons why financial planning could help you spend more in retirement

While you may think of financial planning as focusing on growing your wealth, it’s about creating a plan that helps you reach life goals. For some retirees, that plan could be to increase their spending. There are several ways financial planning could help, including:

1. Assessing how long assets need to last

One of the difficulties of knowing how much to spend in retirement is that it’s impossible to know how long your assets need to provide an income.

Considering life expectancy is a key part of a financial plan. This means you can understand what spending is sustainable for you and provide peace of mind if you’re worried about running out of money.

2. Demonstrating how the value of your assets could change

A useful financial planning tool is cashflow forecasting. It can help you visualise how different decisions will affect the value of your assets.

Cashflow forecasting works by inputting information and making certain assumptions, such as estimated investment returns. While the results cannot be guaranteed, it’s an effective way to see the potential outcomes of different scenarios.

So, you could see the effect on your assets if you increased the income you take from your pension by 20% throughout retirement. Or whether you could afford to double your outgoings for three years to tick off bucket list goals, before returning to a lower income.

If you’re frugal in retirement because you’re worried about the long-term effects, cashflow forecasting could demonstrate how your decisions will affect your finances in the short and long term.

3. Creating a reliable income if it’s right for you

Some retirees struggle with the uncertainty of their retirement income. For example, if you use flexi-access drawdown to access your pension, investment returns could affect its value. You may worry about what would happen if the markets experienced a downturn.

There are ways to create a reliable income and some will find this provides peace of mind.

For example, an annuity is something you can purchase, which would then deliver an income for the rest of your life. If you know the income from an annuity will cover your essential expenses, you may feel more comfortable spending other assets on things you enjoy.

What’s appropriate will depend on your circumstances and priorities. You can speak to us about ways you could create a reliable income in retirement.

4. Giving you someone to turn to

Even with a financial plan in place, there may be times when you still need some reassurance. Perhaps you’re not sure if investment volatility will affect your income sustainability. Or you want to withdraw a lump sum to spend on a once-in-a-lifetime experience, but don’t understand how it’ll affect your finances long term.

Once you have a financial plan in place, regular reviews with your financial planner can help you keep it up to date.

Want help understanding your retirement income? Contact us

If you are retired or nearing the milestone and aren’t sure how much you can sustainably spend, please contact us. We’ll help you review your finances and goals to create a plan that reflects your needs.

Please note:

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The Financial Conduct Authority does not regulate cashflow planning.

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Guide: How to manage the harmful effects of inflation on your wealth

For the last year, inflation has been high. If you’re worried about the effects of the rising cost of living, this guide could help you.

Figures from the Office for National Statistics show, in the 12 months to April 2023, the rate of inflation was 8.7%. This is far above the Bank of England’s target of 2%, and for much of the last year, the rate has been in double digits.

The guide explains why needing to spend more to maintain your lifestyle could affect your long-term plans and how inflation could reduce the value of your assets in real terms.

You can also discover some of the steps you could take to “beat” inflation, including:

1. Making the most of suitable allowances
2. Shopping around for the best interest rate
3. Considering if investing is right for you
4. Reviewing your budget
5. Focusing on your long-term plan.

Download your copy of ‘How to manage the harmful effects of inflation on your wealth’ now to learn more about the effects of inflation and what steps you can take to “beat” it.