What are Eventual Annuities?

Since the Credit Crunch crisis of 2008, flexible drawdown has been more popular at retirement as interest rates low and gilt yields/annuity rates have been low.  More recently, there has been much more volatility with investment markets during Brexit, Covid-19 lockdown, Russia’s invasion of Ukraine, energy crisis and more recently another banking sector wobble with Silicon Valley Bank collapse and Credit Suisse needing to be bought out.  This means that many people in retirement or coming up to retirement have watched the values of their pension fund fluctuate up and down.

How Annuities Work

Firstly, we need to understand how pension annuities work.  When you or your pension scheme gives your pension fund to an annuity provider.  The annuity provider then ‘lends’ your money to the government as government borrowing called government bonds or gilts.  These work in the same way as an interest only mortgage i.e., you borrow money, you only pay interest on the loan say for 25 years and then you pay the capital back at the end.  This is exactly what governments do, they borrow money as interest only loans and they pay the debt off at maturity usually in 20-30 years.  This means that the pension company has a guaranteed income on the pension fund loaned to the government to give them a guaranteed income to enable them to give you a guaranteed annuity income for life.

Annuity Example

• Bank interest rate 2% pa.  Gilt yields (government borrowing cost) 4% pa.
• £100,000 pension buys an annuity for income = £4,000 pa.

Interest Rates Have increased:

• Bank interest rate 4% pa.  Gilt yields (government borrowing cost) 6% pa.
• £100,000 pension buys an annuity for income = £6,000 pa.
• You have a guaranteed income for life £2,000 pa higher than it was 2 years ago.

Is now the time to buy annuities?

Phased Annuity

Your pension remains invested in a drawdown account and periodically you switch some of the drawdown to buy a guaranteed annuity income to suit you.  This way you control your income on day 1, you may still be working or want to get more growth and rather than drawing down capital, you buy an annuity each time you need to boost your guaranteed income.  You are exposed to investment market volatility on the drawdown funds, and you are also exposed to risk of annuity rates changing in the coming years when you phase in your next annuity payment.  This may be good as you get older, annuity rates improve (you are closer to death after all) but interest rates and therefore annuity rates may have reduced.

Eventual Annuities

Pension providers recognise that innovation is required so that their contracts are attractive to advisers and all people at retirement.    Some pension providers are developing their ‘at retirement’ products to offer both the flexibility and death benefits of flexible drawdown as well as taking advantage of lower risk, guaranteed, annuity rates and, in particular now that interest rates and annuity rates are higher than they have been for many years.

Example of Eventual Annuity

• You invest £100,000 of pension fund in an eventual annuity today paying 6% pa (£6,000).
• You have now guaranteed this higher income for life even if interest rates and annuity rates fall.
• That said, you do not need the income right now as you have enough guaranteed income as you are working or have other income sources, but you want to take advantage of higher annuity rates.
• The annuity income is still paid out, but it can be paid directly into a flexible drawdown account sitting alongside your annuity meaning you have received no income and therefore no income tax.
• This will continue to pay into your drawdown account and build up over the years meaning you have a capital account that you can drawdown on when needed or leave as an inheritance on death for loved ones or even buy more annuities if annuity rates go even higher in the future.
• You can then turn the annuity income over to pay you rather than into the drawdown account when needed i.e., it is an eventual annuity.

Contact  Call Back  Calculators  Our Fees