Purchasing an annuity now safer, as legal obligation fades

This week the Government has outlined plans to scrap the legal obligation which makes purchasing an annuity compulsory for pensions savers.

For most pensioners, purchasing an annuity is likely to remain the most cost-effective option of choice, but pensions savers will benefit from greater freedom to choose the timing of the purchase. 

Previously, some pensioners approaching their 75th birthday had been forced to purchase their pensions annuity when rates were low. They will now have freedom of timing their annuities purchase, and waiting for markets to recover, giving them a better annuities deal and a higher pensions income.

Options other than buying an annuity are likely to be attractive only for those with very large pension pots, who do not have to worry that they will run out of capital before the end of their life. For the average pensions saver, whose pensions pot will be £30,000 or less, more expensive options, such as income drawdown, are unlikely to attract.

Income drawdown is a means of leaving your pension savings invested in the stock markets, and living off the income or dipping into your capital to fund your lifestyle. The advantage is that you remain owner of your pension pot and can pass it on to your loved ones; however, there are hefty fees involved.

The government proposals on income drawdown may also cap the amount of pension income that can be taken each year, unless you can prove that you have enough saved never to be dependent on the state.

For the vast majority of pensioners, however, purchasing an annuity will always be the best way of securing a guaranteed income in retirement.