Don't retire hurt: get a better annuity

You can make a huge difference to your pension income if you shop around

The popularity of annuities - the guaranteed income for life that pensioners receive from an insurance company on payment of a capital sum - is at rock bottom. Low inflation, which brings lower investment returns, is resulting in a poor deal for pensioners.

The popularity of annuities - the guaranteed income for life that pensioners receive from an insurance company on payment of a capital sum - is at rock bottom. Low inflation, which brings lower investment returns, is resulting in a poor deal for pensioners.

Even so, we are still obliged to buy a lifetime annuity by the time we are 75, so it is important to shop around for the best deal. Yet many retirees don't.

"It is staggering the number of people who don't realise that they can shop around," says Stephen Brady, at independent financial adviser, Chartwell Investment. "The life companies say 'here is our rate' and people just take it. For the sake of making a few phone calls, you can significantly increase your pension income for life."

According to Mori, of those familiar with the term "annuity", only 55 per cent know the product can be bought from any company offering it. Investors who do not exploit this can be left with annuity payments significantly lower than what they could have received.

For example, a 60-year-old male with a sum of £10,000 can purchase an annuity from NPI worth £692 a year. If he shopped around and chose Scottish Widows or Legal & General instead, he would have received £757 or £815 respectively.

Annuities represent one of the few cases where being overweight or a smoker is beneficial financially - as such you would get enhanced rates. Using the same criteria, a regular smoker could obtain a payment of £836 a year, an improvement of more than 20 per cent on the original NPI quote.

Annuity rates have been falling for the past 10 years because conventional rates are tied to 15-year gilt yields, which have collapsed from a high of 12.4 per cent in 1990 to around 5 per cent today. The outlook for annuity rates remains bleak, not least because people are living longer: in the 1950s, the average 60-year-old male could expect to live for another 10 years; today it is 25 years.

A fixed-rate annuity may be tolerable over 10 years, but over 20 to 30 years, inflation can seriously erode the income. Specialists in the field therefore recommend investment-linked annuities to protect the retirement income.

An investment-linked annuity is tied to a with-profits or unit-linked fund, rather than to gilts, so that the pension fund can continue to grow. A with-profits annuity invests in the insurer's with-profits fund, a mix of equity, property and fixed interest investments.

There is plenty of choice on the market compared with a year ago when only three with-profits annuity providers existed - Equitable Life, Scottish Widows and Prudential. Now, Norwich Union, Scottish Mutual, Axa Sun Life, Legal & General and Standard Life all offer with-profits annuities.

Investors must select an assumed bonus rate (ABR) of up to 5 per cent, which is normally, but not always, fixed for life. Changes in yearly annuity payments are based on the difference between the ABR and the actual bonus paid. So if you chose a low ABR of 3 per cent, but a bonus of 8 per cent was paid, you would get an increase in income the next year of about 5 per cent. If the reverse happened, your income would fall.

Norwich Union guarantees that its with-profits annuity payments will never fall below what you would have received from a 0 per cent ABR. It also allows for a joint life annuity (on the death of the first annuitant) to be converted into a conventional annuity. This gives the surviving spouse peace of mind that payments will not fluctuate.

Prudential offers a similar conversion option. The Standard Life annuity lets you alter the ABR at any time after the first anniversary of the policy. The first three changes are free, but subsequent changes carry a charge. Standard Life also guarantees that your income will not drop more than 10 per cent from the previous year.

Canada Life is offering an Annuity Growth Account which includes some features of both a unit-linked annuity and income drawdown, but it is treated as an annuity by the Inland Revenue. It allows you to use part of your pension fund to buy temporary five-year guaranteed annuities until you reach the age of 85, while keeping the remainder of the fund invested in equity-linked funds.

Under income drawdown rules, a lifetime annuity must be purchased before you are 75, while an Annuity Growth Account allows you to defer until 85. This is because the remaining pension fund is seen as a deferred annuity fund, even though it is invested in equities.

After the first five-year annuity has expired, you can either buy another five-year temporary annuity or purchase a lifetime annuity.

Buying Canada Life's annuities in five-year chunks has three advantages. First, the bulk of your fund can remain invested in any of the company's 22 pension funds, which should boost the fund's value. Second, if annuity rates improve, you can lock into better rates after five years. Third, if your circumstances alter - such as your spouse dying - you can buy a single life annuity after five years instead of being locked into a joint life annuity for life.

"This is really innovative," says Ronnie Lymburn at the Annuity Bureau. "It allows people to have a decent income over five years and to then review what they want to do at five-yearly intervals until aged 85."

It is not difficult to shop around for the best quote: Chartwell has an annuity service, which does the legwork and allows investors to benefit from the commission that most annuity providers pay.

* Contacts: The Annuity Bureau, 020 7620 4090; Chartwell's Discount Annuity Service, 01225 321700.

Finacial products from our partners
Property search
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: Collections Agent

    £14000 - £16000 per annum: Recruitment Genius: This company was established in...

    SThree: Trainee Recruitment Consultant

    £20000 - £25000 per annum + OTE 40k: SThree: SThree are a global FTSE 250 busi...

    SThree: Trainee Recruitment Consultant

    £20000 - £25000 per annum + competitive: SThree: SThree are a global FTSE 250 ...

    Reach Volunteering: Trustees with Finance, Fundraising and IT skills

    Voluntary and unpaid, reasonable expenses reimbursable: Reach Volunteering: St...

    Day In a Page

    Migrant crisis: UN official Philippe Douste-Blazy reveals the harrowing sights he encountered among refugees arriving on Lampedusa

    ‘Can we really just turn away?’

    Dead bodies, men drowning, women miscarrying – a senior UN figure on the horrors he has witnessed among migrants arriving on Lampedusa, and urges politicians not to underestimate our caring nature
    Nine of Syria and Iraq's 10 world heritage sites are in danger as Isis ravages centuries of history

    Nine of Syria and Iraq's 10 world heritage sites are in danger...

    ... and not just because of Isis vandalism
    Girl on a Plane: An exclusive extract of the novelisation inspired by the 1970 Palestinian fighters hijack

    Girl on a Plane

    An exclusive extract of the novelisation inspired by the 1970 Palestinian fighters hijack
    Why Frederick Forsyth's spying days could spell disaster for today's journalists

    Why Frederick Forsyth's spying days could spell disaster for today's journalists

    The author of 'The Day of the Jackal' has revealed he spied for MI6 while a foreign correspondent
    Markus Persson: If being that rich is so bad, why not just give it all away?

    That's a bit rich

    The billionaire inventor of computer game Minecraft says he is bored, lonely and isolated by his vast wealth. If it’s that bad, says Simon Kelner, why not just give it all away?
    Euro 2016: Chris Coleman on course to end half a century of hurt for Wales

    Coleman on course to end half a century of hurt for Wales

    Wales last qualified for major tournament in 1958 but after several near misses the current crop can book place at Euro 2016 and end all the indifference
    Rugby World Cup 2015: The tournament's forgotten XV

    Forgotten XV of the rugby World Cup

    Now the squads are out, Chris Hewett picks a side of stars who missed the cut
    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