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.

PROMOTED VIDEO
Have you tried new the Independent Digital Edition apps?
Arts and Entertainment
On set of the Secret Cinema's Back to the Future event
filmBut why were Back to the Future screenings cancelled?
News
Susan Sarandon described David Bowie as
peopleSusan Sarandon reveals more on her David Bowie romance
Sport
Lewis Hamilton walks back to the pit lane with his Mercedes burning in the background
Formula 1
Arts and Entertainment
The new characters were announced yesterday at San Diego Comic Con
comic-con 2014
Sport
Arsenal supporters gather for a recent ‘fan party’ in New Jersey
football
Arts and Entertainment
No Devotion's Geoff Rickly and Stuart Richardson
musicReview: No Devotion, O2 Academy Islington, London
News
i100
News
newsComedy club forced to apologise as maggots eating a dead pigeon fall out of air-conditioning
Life and Style
Balmain's autumn/winter 2014 campaign, shot by Mario Sorrenti and featuring Binx Walton, Cara Delevingne, Jourdan Dunn, Ysaunny Brito, Issa Lish and Kayla Scott
fashionHow Olivier Rousteing is revitalising the house of Balmain
News
i100
Finacial products from our partners
Property search
Sell it with flowers: competition is 'intense' for homes with outside spaces

Gardens add a tenth to the value of your home

A London estate agent yesterday put a price on having a garden. David Pollock of Greene & Co reckons it can increase a property's value by a tenth.

Spectators at the Isle of Wight music festival watch the World Cup on the big screen. Betting promotions were a feature of the tournament
Lenders have been accused of persuading vulnerable people to borrow expensive credit

Payday loan firms accused of bombarding vulnerable people with nuisance phone calls

Payday loan firms have been accused of bombarding financially vulnerable people with nuisance phone calls, after a debt charity reported that a third of its clients were plagued by the messages.

The foundation proposed that the Government sets up a scheme to help people avoid losing their homes

Mortgages: 'Homeowners could trade down to shared ownership to defuse rate rise timebomb'

A plan to defuse a “mortgage debt timebomb” when interest rates rise is published today amid warnings that 2.3m households could struggle with their repayments.

Current accounts are too costly and confusing, says CMA as it announces investigation into Britain's biggest banks

Competition regulator to investigate market where it's hard for customers to make comparisons and the big banks' charges can be set too high
All the signs have been pointing up for buy-to-let, but there are clouds on the horizon

Buy-to-let: is it a boom or a bubble fit to burst?

People borrowing to be landlords could face the same restrictions as homebuyers, with MPs voicing fears that property speculation may be overheating the market

Moment of truth for payday lenders: Watchdog plans to curb cost of short-term loans

The chief of the City watchdog, Martin Wheatley, spoke exclusively to The Independent's Simon Read about its attempts to control the worst excesses of unscrupulous high-cost credit companies

Consumers given power to choose a green deal

How would you like to be able to choose how your electricity is made and even where it come from? It may sound futuristic and fanciful but the independent supplier Co-operative Energy has made it a reality this week.

'Scrap the trap': calls for change grow as banks are told to play fair with loyal savers

City regulator says existing customers suffer worst rates

Motor insurers divided on proposals for whiplash ban

MPs want medical evidence for claims. Will this bring higher premiums?

British Gas repays £1m for mis-sold deals

British Gas was yesterday forced to pay back £1m to its customers after mis-selling them energy deals.

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

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

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Senior Risk Manager - Banking - London - £650

    £600 - £650 per day: Orgtel: Conduct Risk Liaison Manager - Banking - London -...

    The benefits of being in Recruitment at SThree...

    £18000 - £23000 per annum + Comission: SThree: SThree, International Recruitme...

    Test Analyst - UAT - Credit Risk

    £280 - £300 per day + competitive: Orgtel: Test Analyst, Edinburgh, Credit Ris...

    Trainee Recruitment Consultants - Banking & Finance

    £20000 - £25000 per annum + OTE £40,000: SThree: SThree Group have been well e...

    Day In a Page

    Best comedians: How the professionals go about their funny business, from Sarah Millican to Marcus Brigstocke

    Best comedians: How the professionals go about their funny business

    For all those wanting to know how stand-ups keep standing, here are some of the best moments
    Jokes on Hollywood: 'With comedy film audiences shrinking, it’s time to move on'

    Jokes on Hollywood

    With comedy film audiences shrinking, it’s time to move on
    Edinburgh Fringe 2014: The comedy highlights, from Bridget Christie to Jack Dee

    Edinburgh Fringe 2014

    The comedy highlights, from Bridget Christie to Jack Dee
    Evan Davis: The BBC’s wolf in sheep’s clothing to take over at Newsnight

    The BBC’s wolf in sheep’s clothing

    What will Evan Davis be like on Newsnight?
    Finding the names for America’s shame: What happens to the immigrants crossing the US-Mexico border without documents who never make it past the Arizona desert?

    Finding the names for America’s shame

    The immigrants crossing the US-Mexico border without documents who never make it past the Arizona desert
    Inside a church for Born Again Christians: Speaking to God in a Manchester multiplex

    Inside a church for Born Again Christians

    As Britain's Anglican church struggles to establish its modern identity, one branch of Christianity is booming
    Rihanna, Kim Kardashian and me: How Olivier Rousteing is revitalising the house of Balmain

    Olivier Rousteing is revitalising the house of Balmain

    Parisian couturier Pierre Balmain made his name dressing the mid-century jet set. Today, Olivier Rousteing – heir to the house Pierre built – is celebrating their 21st-century equivalents. The result? Nothing short of Balmania
    Cancer, cardiac arrest, HIV and homelessness - and he's only 39

    Incredible survival story of David Tovey

    Tovey went from cooking for the Queen to rifling through bins for his supper. His is a startling story of endurance against the odds – and of a social safety net failing at every turn
    Backhanders, bribery and abuses of power have soared in China as economy surges

    Bribery and abuses of power soar in China

    The bribery is fuelled by the surge in China's economy but the rules of corruption are subtle and unspoken, finds Evan Osnos, as he learns the dark arts from a master
    Commonwealth Games 2014: Highland terriers stole the show at the opening ceremony

    Highland terriers steal the show at opening ceremony

    Gillian Orr explores why a dog loved by film stars and presidents is finally having its day
    German art world rocked as artists use renowned fat sculpture to distil schnapps

    Brewing the fat from artwork angers widow of sculptor

    Part of Joseph Beuys' 1982 sculpture 'Fettecke' used to distil schnapps
    BBC's The Secret History of Our Streets reveals a fascinating window into Britain's past

    BBC takes viewers back down memory lane

    The Secret History of Our Streets, which returns with three films looking at Scottish streets, is the inverse of Benefits Street - delivering warmth instead of cynicism
    Joe, film review: Nicolas Cage delivers an astonishing performance in low budget drama

    Nicolas Cage shines in low-budget drama Joe

    Cage plays an ex-con in David Gordon Green's independent drama, which has been adapted from a novel by Larry Brown
    How to make your own gourmet ice lollies, granitas, slushy cocktails and frozen yoghurt

    Make your own ice lollies and frozen yoghurt

    Think outside the cool box for this summer's tempting frozen treats
    Ford Fiesta is UK's most popular car of all-time, with sales topping 4.1 million since 1976

    Fiesta is UK's most popular car of all-time

    Sales have topped 4.1 million since 1976. To celebrate this milestone, four Independent writers recall their Fiestas with pride