Why avoid annuities?
Annuities are used to convert a lump sum into a regular income.
Using an annuity to convert a pension pot into a regular pension has been widely used However it doers have several disadvantages and the annuity system has come in for a lot of criticism. Pension holders need a regular income when they retire the way this income was achieved was by purchasing an annuity from an insurance company. In return an insurance company will pay an income for life.
Disadvantages of annuities.
- When purchasing an annuity you loose all rights to your pension pot. Upon death the insurance company stops paying an income.
- You can purchase an annuity that will also pay your spouse. However they are expensive. The annuity rate will drop substantially thus reducing you pension.
- If interest rates are low when you purchase an annuity then the annuity rate will be low, and consequently so will your pension.
- Once annuities are purchased the rate does not go up when interest rates increase they remain at the level at purchase date.
- Most annuities are not index linked. This means that a person who buys such an annuity will experience a reduction in buying power as each year goes buy. Value
- You can purchase an index linked annuity that will increase your income in line with inflation. However such annuities achieve this by starting from a very low level, therefore the amount that you receive initially and years to come thereafter will be substantially less then a level annuity.
