An Alternative to Traditional Annuities

Retirement savers who are reluctant to purchase an annuity on retirement because of their perceived poor value, but are not prepared to take the investment risks involved with income drawdown are now able to take another option. Living benefits have been around in the USA for some time but have only crossed the Atlantic recently. What they do is guarantee a similar annuity income that would be available from a traditional annuity but they pay that income for a term up to age 75 when an annuity has to be purchased in any case, or it can be in 5 year rolling terms. A Living benefit will also provide a guaranteed maturity value at the end of the term whether for 5 years or through to age 75.

This is extremely useful as it allows the individual the certainty of income payments without the risk of fluctuating fund performance associated with an income drawdown contract but more importantly it gives the certainty that the annuity is not locked in for lifetime if, for example, health deteriorates and the individual would be eligible for an increased annuity income due to shortened life expectancy.

The traditional route was to take an annuity from the best “open market” rates at retirement and that would be payable until the individual died and then a reduced income would be payable to their spouse for the rest of their life. With annuity rates decreasing over the past few years due to increased life expectancy and by reduced returns from long term investment yields, it was always a trade off between accepting the guaranteed annuity for life which is the risk free route or to move into income drawdown where the potential for increasing income payments was attractive if the performance of the underlying funds within the drawdown contract were positive.

This really is a “having your cake and eat it” halfway house and one I believe every person approaching retirement should explore as it gives the certainty of traditional annuities but without the lock in of the reduced rate for the rest of life.

There are many variations on the themed concept of Living benefits but a good Independent Financial Adviser specializing in the provision of lifetime incomes will be able to guide you through the options that would suit you. One route that I am seeing more and more of is a split between Living benefits and income drawdown to get the best of both worlds.