Why everything you thought about pensions is now wrong

Mr Burrows said annuities were at a turning point as they now paid a healthy rate of return while offering pensioners much-sought-after security.

“Think of an annuity like a mortgage but in reverse,” he said.

“You pay the insurance company a lump sum and it pays you back the capital and interest over time. When rates were low, people were just getting their own capital back if they were lucky, but now they get that plus a decent return, so it is far more valuable than it was.”

Savers tend to think they are better off with drawdown, but that is no longer necessarily the case, he said.

“If you don’t get the right investment returns, you could run out of money too soon.”

Someone in drawdown who takes £6,000 a year from a £100,000 pot would run out of money by the age of 85 if their annual return is 3pc or lower after fees and charges, Mr Burrows said.

Annuity providers have started to struggle with a sudden rise in demand as savers try to lock in at higher rates, according to Mark Ormston of Retirement Line, another financial advisor.

Millions of pensioners with “defined contribution” pensions invested in the stock market have suffered a pension cut as markets tumble.

Falling markets have wiped nearly 7pc off the average defined contribution pension fund in the past six months, according to data service FE fundinfo.

As a result, many have rushed to secure a guaranteed income and remove risk from their retirement savings, said Mr Ormston.

“People are seeing their pension fund drop and they tend to look for certainty, which an annuity does give,” he said.

“A lot of people have been in touch after their fund fell by 10pc. It may seem like a bad time to cash out of stock markets, but annuity rates have improved so much that they are still securing a higher income than they would have at the start of the year. These higher rates are making up for fund falls.”

There has been a 20pc jump in the number of people requesting quotes for annuities since the second half of last year, according to Canada Life, an annuity provider.

The group said it had increased its annuity rates 14 times this year already, with rates up by 30pc so far.

“Annuities are making a fight back, with the market seeing a significant positive shift in rates,” said Nick Flynn of Canada Life.

“Customers spooked by the financial markets are looking to get the most value from their pension savings while seeking a lifetime of income security.”

The type of pensioner who buys an annuity is also changing, Mr Ormston said.

Those who one over recent years have been very cautious of taking investment purchased risk.

However, as rates have increased, wealthier pensioners, who can afford to buy secure income with part of their fund while leaving some invested, have done so, he said.


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