Why The Stock Market Is The Best Place For Your Annuity Money

There’s been a lot of fuss lately about how we’re going to spend our pension pots now that the government has finally put us in charge of our own money.

Until now, the decision was largely made for us. We were obliged to use the money to buy an annuity, an income for life, by age 75 at the latest.

Following Chancellor George Osborne’s recent Budget, that obligation will be blown away from April next year, leaving us free to spend our money on whatever we want. 

Lamborghini? You’re Having A Laugh

Pensions Minister Steve Webb said that if we want to blow it all on a Lamborghini, we can. Given that the average pension pot at retirement is around £30,000, most of us could barely stretch to a Toyota Avensis.

A small number will still buy an annuity, but up to three-quarters of us won’t, Legal & General predicts.

So what should we use the money on?

Pay Your Debts Down First

If you’ve got outstanding debts, such as a mortgage or credit cards, you should clear them first.

retirementOnce you’ve done that, forget the Lamborghini. Your priority is to make sure that money sees you through for the rest of your life.

Sticking your pension in a savings account won’t do the job. Right now, the average savings account gives you a meagre return of 0.62%. 

With inflation almost three times higher at 1.7%, your money will fall in real terms, year after year. If you live for another 20 or 25 years, it could dwindle to nothing.

Forget Buy-To-Let

Given the British passion for property, buy-to-let will undoubtedly tempt many.

But it will only work if your pension pot is large enough to slap down a deposit on a second home, and cover the cost of doing it up to make it fit for tenants.

You also have to decide if you really want to spend your retirement hunting for tenants, dealing with complaints or evicting those who don’t pay the rent.

A Good Time To Take Stock

Investing in stocks and shares is a lot less hassle than buying a property and gives you more protection against inflation than cash.

Shares are also a great way to generate income.

If you invest in a spread of dividend-paying blue-chip stocks such as GlaxoSmithKline, Royal Dutch Shell, J Sainsbury, Centrica, National Grid, Scottish & Southern Energy or Vodafone, you can generate income of more than 5% a year.

Plus you also get capital growth on top.

And if you put those shares inside your new extended £15,000 ISA allowance, you can take both the income and growth free of tax (whereas buy-to-let rental income is taxable).

A Home Of Your Own

Stocks and shares will be too risky for many pensioners. But you can reduce the risk by drawing a little money from your pension each year, and drip feeding it into the market.

Taking smaller chunks from your pension every year, rather than the whole pot all at once, can also help reduce your income tax bill.

The stock market isn’t for everybody. But in the longer run, it may still prove the best home for at least some of your annuity money.

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Harvey owns shares in Royal Dutch Shell. The Motley Fool has recommended shares in GlaxoSmithKline.