From 2011, certain retirees in the United Kingdom shall be freed from the requirement to purchase an annuity at the age of seventy-five. The annuity requirement applies to private workers only. Pensioners will now also have the option of taking the full amount of their pension as a lump sum or as drawdown income, so long as they satisfy a minimum income requirement. Pension annuities offer a guaranteed monthly income to private pension holders.
In other countries, there might not be such a direct link between pensions and annuities. In the U. S., less than one in five companies offer annuities as part of their defined contribution 401k retirement plans. Unlike the U. K., employees are also not required by the government to utilize them. These plans, like their British counterparts, are ones that require employees to also contribute from their earnings. The number of participants in such plans has risen from 11 million to 67 million between 1975 and 2007 according to the latest available figures from the Department of Labor.
Mutual fund companies, which administer and provide the majority of 401k options, have found their clients do not favor annuities. Guaranteed income from Social Security and Medicare benefits has meant, employees favor retaining their savings as assets. As currently used, the plans offer the opportunity of flexibly spending plan assets over time.
However, in the United Kingdom, conditions are different. Recently announced governmental rule changes mean those in a higher income bracket will have greater flexibility, as they will no longer be required to purchase an annuity when they reach 75. The new rules would enable the market to introduce new products to capture this more flexible group of pensioners. At the same time, most people are expected to continue reliance on annuity income.
The consideration of which annuity to buy, from which provider, and how to time the purchase are important aspects of a vital decision. In the current financial condition, millions will face pension payouts that are the worst since records began. They face receiving close to half the income they would have received just 15 years ago. Falling interest rates have produced falling annuity rates and the resultant plunge in pension payouts. Interest rates are now half what they were in the early 1990s. As a result, retiring employees face a situation not experienced by previous generations.
They have several options to mitigate the challenge. They can put off buying until they are 75. Annuity rates improve the longer you put off the purchase by as much as a third or a half better. The latter in the case of RPI protected annuities. People may choose to work longer. This will depend on agreeable employers and their health condition. Courts have pronounced that companies may force employees to retire at the appointed age. They must consider a request for continued employment, but can reject it without reason.
Pensioners may benefit from comparison shopping. The use of drawdowns might also improve prospects as this would keep the pension money invested. A two-track, capped or flexible, scheme is being considered by the government. Phased retirement may also be considered or variable annuities that leave the money invested. These differ from drawdown policies as they guarantee value of the investment at 75.
