Guaranteed Income For Life

Seniors are living longer.  They are healthier and can enjoy more robust pursuits.  Some will make it to one hundred or more.  A great prospect for anyone who is retiring.  It may even include starting on a second career. 

enjoying retirement

The only downside is that income may well be at a reduced level.  Whatever savings you may have will not last for ever.  This is a serious concern.  How can you resolve this dilemma?

Can you guarantee that income? Income Drawdown Plans

If you have significant savings, then a variety of choices are open to you.  One option is to use an income drawdown plan.

Income Drawdown (also known as an unsecured pension) allows you to take income from your pension fund while the fund remains invested and continues to benefit from any fund growth.  You generally need a substantial fund value to take income drawdown. The amount of fund varies according the rules of the pension provider, but is around £100,000.

As the UK Telegraph points out there are now low cost drawdown plans, which offer an alternative to annuities.

One of the most significant developments will be the emergence of “low-cost income drawdown plans”, which one expert has dubbed “middle-class pension plans”.  Although not widely available at present, these plans should offer a lower-risk alternative to conventional drawdown products – and look set to become more commonplace this year.

What does not receive adequate discussion are the implications if you live to a great age.  Drawdown plans may involve a very significant reduction in income as time rolls on.  This is avoided if you purchase an annuity.  In this case it is the provider of the annuity who is taking the risk that you will live a very long time.

What is an annuity?

An annuity provides you with a guaranteed income for life when you retire. You buy an annuity using a lump sum from your pension or, perhaps, from your savings. Annuities remove the worry of having to budget for an unknown and uncertain period of time.  With such financial support, living longer creates no budgetary headaches.

Now is a good time to be considering buying annuities, according to a Guardian article.

People retiring this year should consider buying annuities sooner rather than later to avoid further cuts in their retirement income, a pensions expert has warned.  The cuts are yet another fall out from the Greek economic crisis: investors have sought safety by buying gilts and other low-risk bonds, forcing up their price and consequently reducing their yield. Annuities are based on gilts, so the more expensive they are, the less income retiring investors will get in return for their pension fund.

Selling annuities

If you do decide to go the annuity route, what happens if circumstances change.  Are you locked in?  In the United States, a secondary market for annuities is steadily growing, letting investors sell their policies, sometimes for more than their insurer would give them.  The secondary market has actually been in place for the past 15 years, but individual seller interest has picked up during the past two.

Image Credit:  Courtesy of Norma Desmond via Flickr

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