The suggestion by pensions minister Steve Webb on Sunday that providers should offer so called “switchable” annuities has raised some eyebrows amongst those in the advice profession. You see the concept of a switchable annuity is nothing new; in fact, it has been around for quite some time.
Fixed term annuities involve the purchase of a short-term annuity (up to 5 years) with a part of your pension fund. Using this type of annuity can have a number of advantages for clients:
- It allows you to fix your annuity rate at least every 5 years, rather than locking in for life, one of Mr Webb’s main bugbears.
- Should health deteriorate in later life you could then take advantage of an enhanced annuity rate.
- It leaves your options open to take advantage of a different form of retirement income in the future.
As with all attractive financial planning options however, there are some risks. The main one being if annuity rates continue their long-term downward trend. In the same way as fixing into a mortgage deal can be a risk if interest rates fall lower the same is true for a fixed term annuity. You could find that the rate has fallen when you come to “renew” your retirement income.
As I have argued for some time now, surely the best way to ensure a comfortable retirement is to diversify your retirement income in the same way that you would diversify an investment portfolio. For many clients taking an income from a variety of different sources could be a suitable hedge against “annuity rate risk”. For example, you may wish to take some income in the form of a lifetime annuity, some from a fixed term annuity and some in the form of a drawdown pension.
Clearly the correct mix of retirement income will depend on your personal circumstances and objectives and given the long term nature of annuity purchase, I would recommend that you take advice from a Chartered Financial Planner before making any important decisions.