Are annuities the right solution for retirement income?

Old man with feet up reading newspaper People are approaching retirement with smaller pension pots and the prospect of living a longer life so it's no surprise the search for income is forefront in most people's minds.

The Office of National Statistics revealed last week that the number of over 65s in employment has tipped the one million mark. Although we don't know how many of the million people want to work and how many can't afford to retirement it is safe to assume that there is a fair chunk of people that just don't have enough money to wind down their working week.

For those who are thinking of giving up work their problems don't end with concerns about small pension pots, it's even more difficult to turn that money into a reasonable income.

With annuity rates depressingly low, high inflation and poor interest rates it would seem that the standard option of buying an annuity is becoming less and less attractive.

In fact, it could be argued that annuity rates are now a pointless product considering how long we will live in retirement. Unless you buy an expensive inflation-proofing annuity, your money is likely to be eroded away over time and once you've locked in you cannot share in upside of the stock market or increases in interest rates.

Hardly compelling arguments for annuities – oh, and don't forget the fact that once you've bought it you can't change it and the damage is done – so it's no surprise that more people are looking at drawdown. Drawdown allows you to leave your pension invested and take an income from it.

It's a simple concept but is typically seen as the preserve of wealthy people but it can benefit people with all size pensions as long as you are OK with taking the stock market risk involved.

In the US the majority of pensions are placed into drawdown because people are more comfortable with investment. Retirement is now a prolonged period that requires a change in investment strategy. You wouldn't invest your entire pension fund in cash when you are working so why would you effectively do the same by buying an annuity in retirement.

We need to be realistic about our retirement – it's going to be a long time and you need a sensible investment strategy that will continue to provide you with an income in your old age. And it doesn't look like annuities will continue to cut it.
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