Money: Investing for income - Use an annuity as an income boost

UNLIKE many other forms of investment, the income payable from an annuity is guaranteed for a set period, typically the rest of your life. In return for the payment of a lump sum, annuity providers - usually life insurance companies - pay you a regular income with no restrictions on how you use the cash.

All investors with a personal pension must use their pension funds to buy a personal pension annuity, often known as a compulsory purchase annuity, when they retire.

Do, however, shop around for your annuity - don't allow yourself to be pressured into buying the product offered by your personal pension provider, as some insurers offer much better rates than others.

Note also that the income you get depends on the average life expectancy of someone your age. Personal pension annuities guarantee a regular income for the rest of your life. So women, who on average live longer than men, get smaller annuities. Older people, in contrast, get larger annuities.

If you have a reduced life expectancy - maybe because you suffer from a life-threatening disease, for example - look at the impaired life annuity market. Under these contracts, you get a much higher income because the provider does not expect to have to pay out for so long.

One insurer, Stalwart Assurance, even offers annuities for smokers and overweight investors. The rates are higher because such people are statistically more likely to die earlier.

However, not all annuities are aimed at pensioners. Purchase life annuities, which pay out an income until the death of the buyer, or temporary annuities which run for a set period of time, are a tax-efficient way of investing for income. An annuity bought with a pension fund is taxable like any other income at your usual rate of tax, but non-pension annuities enjoy a nifty little tax break. You are allowed to count a chunk of the annuity income you receive as "return-of-capital" rather than income. The size of this chunk is laid down by the Inland Revenue and is dependent on your age, and only the income part of the annuity is subject to tax.

Annuities can be attractive as part of an income-producing investment strategy.

"They seem to be very popular as part of a substantial portfolio, building in some guarantee," says Ronnie Lymburn, a director of The Annuity Bureau, a specialist annuity adviser. Mr Lymburn points out that with many other investments bought for income, there are no guarantees about what you will actually receive.

The problem with buying an annuity right now is that gilt yields, on which annuity rates depend, are extremely low. As a result, rates have fallen. For example, a pounds 100,000 pension fund will currently buy a healthy 65-year-old man an annual annuity of around pounds 10,300. A year ago the figure was pounds 11,200.

The income will be even smaller if you decide to buy a joint life annuity, which pays an income until both of the two people involved, normally husband and wife, die.

And remember the effect of inflation. A fixed income loses its spending power over time. Escalating annuities, where your income rises each year, usually in line with inflation, are much more expensive.

There are several annuity advisers which will help you get the best deal for your money. These include: The Annuity Bureau (0171 620 4090), Annuity Direct (0171 583 9393) and William Burrows Annuities (0171 628 3455).

q The 'Independent' and 'Independent on Sunday' are offering a free guide to buying personal pensions direct, sponsored by Eagle Star. For a copy call 0800 776666 or fill in the coupon on page 12.

Start your day with The Independent, sign up for daily news emails
Have you tried new the Independent Digital Edition apps?
Finacial products from our partners
Property search
In too deep? Travel cover is among the benefits offered by packaged bank accounts

Claims firms blamed as complaints soar over packaged bank accounts

Many customers complained they were switched to the accounts without their knowledge

Finger on the interest rate trigger: the Bank of England

The best deals on personal loans: Peer-to-peer providers are more competitive for smaller sums

Meanwhile, high-street lenders continue to cherry-pick and be more competitive on larger loans

China stock collapse: Five things you need to know about 'Black Monday'

The market plummeted this week, losing all the gains made for the year

Which? warns sports fans about Rugby World Cup ticket scams

GetSporting.com offers deals that may be too good to be true

Could it be the time to focus on Japan? Some believe the country has no choice but to boost consumption and the economy will get back on track

Investors told to travel the world in the search for higher returns

Assets have risen in value across the board and volatility isn't going away. Rob Griffin asks where we should put our cash
As rising house prices push up demand for renting, so tenants are having to dig deeper than ever

Starter home initiative is urgently needed as rents go through the roof

Rents in England and Wales rose by 1.9 per cent in July to an average of £804

Peer-to-peer lending rates put Nisas to shame

The returns from P2P providers look more attractive than ever

Questions of Cash: Log-in problems turned eDreams booking into one-way ticket to nowhere

The company failed to provide our reader's flight ticket - or a refund

Hot property: business has been booming in estate agents this month, even though it’s the height of the summer holiday season

Heat rises for mortgage deals as UK homeowners sense a rate hike coming

The housing market should go quiet in August but instead people have been acting like cheap loans won't last. Do we really have to rush, asks Simon Read
Phones have now overtaken personal computers as the most used way of accessing the internet

Who you gonna call? The Complaints Busters

Unhappy customers have been given their own Ombudsman to help fight for them.

Undergraduates are being tempted with freebies by banks

Students should give freebies a wide berth and focus instead on cheap borrowing

An interest-free loan far outweighs the value of any of the bank's incentives

The Spanish carrier changed a reader's flight from Madrid – to a time before she was due to land

Questions of Cash: 'A connecting Vueling flight was cancelled and all my travel costs were left hanging in the air'

Our reader encountered problems when flying from London to Ibiza in May to take part in a charity ride

Complacency about rising rates could prove to be costly

Interest rates stay at 0.5% for now - but don't wait to get a better deal on your savings and mortgage

The years of ultra-low rates are coming to an end

The elderly are being targeted by fraudsters with postal scams such as fake prize draws

Fraudsters are bombarding older people with dangerous pension scams: here we reveal the warning signs

Many people are being repeatedly targeted by crooked schemes

Football and credit cards aren't always a good match

A football club-branded credit card could end up being a financial own goal

It may be a great talking point when you get your football club plastic out in front of your mates, but these deals aren't the best option for all fans

Latest stories from i100
Have you tried new the Independent Digital Edition apps?
SPONSORED FEATURES
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Recruitment Genius: Mortgage Administrator

    £20000 - £25000 per annum: Recruitment Genius: We are a vibrant and establishe...

    Recruitment Genius: Payments Advisor

    £15000 - £20000 per annum: Recruitment Genius: An experienced Repayments Advis...

    Recruitment Genius: Investment Analyst

    £25000 - £30000 per annum: Recruitment Genius: This leading provider of financ...

    SThree: Trainee Recruitment Consultant

    £20000 - £25000 per annum + competitive: SThree: Are you looking to take your ...

    Day In a Page

    A groundbreaking study of 'Britain's Atlantis' long buried at the bottom of the North Sea could revolutionise how we see our prehistoric past

    Britain's Atlantis

    Scientific study beneath North Sea could revolutionise how we see the past
    The Queen has 'done and said nothing that anybody will remember,' says Starkey

    The Queen has 'done and said nothing that anybody will remember'

    David Starkey's assessment
    Oliver Sacks said his life has been 'an enormous privilege and adventure'

    'An enormous privilege and adventure'

    Oliver Sacks writing about his life
    'Gibraltar is British, and it is going to stay British forever'

    'Gibraltar is British, and it is going to stay British forever'

    The Rock's Chief Minister hits back at Spanish government's 'lies'
    Britain is still addicted to 'dirty coal'

    Britain still addicted to 'dirty' coal

    Biggest energy suppliers are more dependent on fossil fuel than a decade ago
    Orthorexia nervosa: How becoming obsessed with healthy eating can lead to malnutrition

    Orthorexia nervosa

    How becoming obsessed with healthy eating can lead to malnutrition
    Lady Chatterley is not obscene, says TV director

    Lady Chatterley’s Lover

    Director Jed Mercurio on why DH Lawrence's novel 'is not an obscene story'
    Farmers in tropical forests are training ants to kill off bigger pests

    Set a pest to catch a pest

    Farmers in tropical forests are training ants to kill off bigger pests
    Mexico: A culture that celebrates darkness as an essential part of life

    The dark side of Mexico

    A culture that celebrates darkness as an essential part of life
    Being sexually assaulted was not your fault, Chrissie Hynde. Don't tell other victims it was theirs

    Being sexually assaulted was not your fault, Chrissie Hynde

    Please don't tell other victims it was theirs
    A nap a day could save your life - and here's why

    A nap a day could save your life

    A midday nap is 'associated with reduced blood pressure'
    If men are so obsessed by sex, why do they clam up when confronted with the grisly realities?

    If men are so obsessed by sex...

    ...why do they clam up when confronted with the grisly realities?
    The comedy titans of Avalon on their attempt to save BBC3

    Jon Thoday and Richard Allen-Turner

    The comedy titans of Avalon on their attempt to save BBC3
    The bathing machine is back... but with a difference

    Rolling in the deep

    The bathing machine is back but with a difference
    Part-privatised tests, new age limits, driverless cars: Tories plot motoring revolution

    Conservatives plot a motoring revolution

    Draft report reveals biggest reform to regulations since driving test introduced in 1935