Only about one in 10 DC pension holding retirees are currently buying annuities. Many advisers are still steering clients away from buying annuities post-Pension Freedoms, often because they think annuity rates are so poor. However, it is worth looking again.
Recent data from Moneyfacts shows the average annual annuity income rose by between 1.4 per cent and 4.8 per cent in the first half of 2018.
So, it is up 14.6 per cent since the Brexit vote back in June 2016 and now sits just 1.2 per cent lower than when freedoms came in the year before that.
Not only have core rates began to bounce back up, but advisers need to consider that it is increasingly likely there will be two pension holders in many of your clients’ households.
Depending on the wider circumstances it may be better for one or even both partners to buy a single life annuity with no additional death benefits for the higher starting level of income. And if you do not link the annuity to inflation either then the annuity being offered can start to look quite generous.
75th Birthday Pensions Tax Hit
Finally, it is increasingly likely that you will be looking after clients that are approaching their 75th birthday.
75 is not that old these days and some may only just have fully-retired by then.
Pre-Freedoms you used to have to buy your annuity before age 75.
Now there is a different kind of cliff edge on that birthday in the sense that on death before age 75, any pension benefits can be paid as a lump sum or as a drawdown pension to any beneficiary tax-free, irrespective of whether they derived from uncrystallised or crystallised monies.
But on death after age 75, any benefits will be taxable.
There is also a second test of the Lifetime Allowance at age 75, measuring the increase in fund size since crystallisation against any remaining unused allowance.
It may be wise therefore to ensure that your clients are not right on the LTA threshold as they approach age 75. Encourage clients to reduce the size of their overall pots in the run up to that age. As a minimum they should take all income from investment gains.
This may run contrary to some IFAs’ thinking on keeping as much income invested for as long as possible but it makes sense in view of the fact that more and more of us will be living to a ripe old age.
If they do not need the income for current spending, it may be better to take it and give it away than paying a Lifetime Allowance tax charge at age 75.
Giving away early can also help to reduce future IHT bills.
