Annuities aren't has-beens if you hunt for the best deal
Many investors feel the 'income for life' will end up leaving them short-changed. Annie Shaw finds they could be better off than they think
Sunday 17 February 2008
Annuities aren't popular with many people putting money by for their retirement, and it's easy to see why. Quite apart from the halving in annuity rates since the early 1990s, savers fear they won't get their money's worth. As 75 per cent of their private pension pot must be turned into one of these policies by the age of 75, in return for an income for life, there is a risk they won't live to enjoy all their savings. What's more, any unused annuity funds can't be passed on to their heirs when they pass away.
But on the flipside, there is no chance the money will run out with annuities, as it could do with other savings, and industry experts dispute the contention that they represent a bad deal. "Annuities are regularly written off by investors as poor value for money, but academic studies have repeatedly shown that they deliver fair value," says Tom McPhail, head of pensions research at independent financial adviser (IFA) Hargreaves Lansdown.
And we are all living longer. The Office for National Statistics predicts that the number of centenarians will grow to a total of 40,000 by 2031.
Buying an annuity is unavoidable for most people, but being lumbered with a bad deal isn't. The amount of income paid by a policy depends on the provider, and IFAs stress the importance of exercising the open market option (OMO). With the OMO, savers take their pension pot and buy the best possible annuity from the whole range of providers, instead of simply accepting the policy offered by the insurer that managed their pension fund.
The one situation where you should stick with your original provider is if your pension contains an annuity guarantee. Some older, usually with-profits, contracts have valuable guarantees that can give you an annuity rate up to 60 per cent higher than you will find on the open market.
How much income you receive will depend on a number of factors: the size of the fund saved, prevailing annuity rates, and estimated longevity as calculated by an actuary, who will consider your age at the time of buying the annuity and your gender.
Annuities can be taken out on a joint-life basis, which means the policy will continue to provide for a spouse or civil partner. In addition, they can be designed to increase in line with prices, which can be very useful. "Inflation is the enemy of retired people because it erodes the buying power of their pensions. Once you retire, there are no more bonuses, no more overtime and no more promotions," says Kevin Pacey, head of the Bank of Scotland Annuity Service.
Of course, adding a spouse or guarantee is going to cost more. In other words, it will mean less immediate income in exchange for added benefits.
"Inflation linking currently reduces the initial pension for a 65-year-old male by 35 per cent," says Mike Fosberry at adviser Smith & Williamson.
The annuity market works by pooling risk. This means that people with high-risk lifestyles or suffering from medical conditions actually get more, because they are unlikely to live as long as the healthy.
Smokers can get what's called an "enhanced annuity", while heart disease sufferers, asthmatics, diabetics and people who have a high body mass index can buy an "impaired annuity". These can equate to an income boost of anything up to 15 per cent.
Last year, Legal & General even started offering enhanced annuities to those living in postcode areas with higher-than-average mortality rates.
The Microsoft mogul told fans a few home truths during his Reddit AMA
10 tips for taking out a personal loan
Simon Read: Frozen in time - the expat British pensioners who deserve a better deal
Weekly Money: Round-up of the personal finance stories you may have missed 26-30 January
Revealed: Amazon earns more through government grants than it pays in tax
City Watchdog to investigate banks' handling of PPI compensation claims
- 1 Woman falls to her death as she celebrates marriage proposal at the edge of Ibiza cliff
- 3 Dad attempts revenge on teenage daughter, plan backfires spectacularly
- 4 Ball pool for adults opens in London
- 5 Amal Clooney gives excellent response to fashion question at European Court of Human Rights
9 reasons Greece's experiment with the radical left is doomed to failure
'We would evict Queen from Buckingham Palace and allocate her council house,' say Greens
Have we reached 'peak food'? Shortages loom as global production rates slow
Greece elections: Syriza and EU on collision course after election win for left-wing party
British grandmother Lindsay Sandiford faces execution by firing squad in Indonesia
Liberal Democrat minister defends comments suggesting immigration causes pub closures
iJobs Money & Business
£40000 - £50000 per annum: Recruitment Genius: This is an exciting opportunity...
£30000 - £35000 per annum + Benefits: Ashdown Group: Marketing Manager - Marke...
£13000 per annum: Recruitment Genius: This Pension Specialist was established ...
£23000 - £26000 per annum + Benefits: Ashdown Group: Market Research Executive...
Day In a Page
A minimnalist four-bedroom home designed to the highest spec, featuring glass walls and a kitchen space lit by a glass roof
Hibernate during winter and make your living during the summer at this busy guesthouse with panoramic sea views, in the village of Lynton
A four-bedroom penthouse next to the Tate with direct views of St Paul's from two floors of luxurious living space
A four-bedroom detached home surrounded by spacious gardens and woodland, close to New Pudsey
An 18th-century, three-bedroom home near Langstone Harbour built from ships beams with vaulted ceilings and wood burning stoves
A five-bedroom semi-detached home with a mix of period and modern features in a popular and convenient location
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
A three-bedroom villa with self-contained flat, minutes from Lake Windermere
A deceptively spacious, beautifully presented Georgian home with 3000sq ft of living space and five reception rooms
A five-bedroom Victorian home with four receptions, superb gardens and paddock in Pembury
An eight-bedroom house on the south side of the The Green with cinema, wine cellars and summer house
This 17th century beauty is full of rustic cosiness, while the detached home office means you can also run a business
Four exclusive apartments in a Grade II-listed former medical school with 2,275 sq ft of living space and 18ft ceilings
A five-bedroom terraced house on the popular Peterborough Estate, ideally located for both Eel Brook Common and South Park
A state-of-the-art farm-building conversion on the former Cliveden Estate, with 11,420sq ft of internal space, cinema and wine cellar
A three-bedroom, 15th-century cottage with original features in the picturesque village of Sissinghurst
A six-bedroom terraced house with large south-facing roof terrace, cinema room and wine cellar
A new seven-bedroom home built in Queen Anne-style with swimming pool and parkland views in Mortimer
A listed, four-bedroom farmhouse in the rural hamlet of Rushall with detached barn, four acres of gardens and paddocks
A first-floor flat with two bedrooms, a spacious reception room and communal grounds in a leafy part of London
A three-bedroom flat with a spacious rootop terrace and balcony, accessed from a private gated courtyard
A Grade II-listed pile with six bedrooms, stables and 39 acres of grounds in Standlake
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion