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

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.

News
Ian Thorpe had Rio 2016 in his sights
people
Sport
Thiago Silva pulls Arjen Robben back to concede a penalty
world cup 2014Brazil 0 Netherlands 3: More misery for hosts as Dutch take third place
News
Tommy Ramone performing at The Old Waldorf Nightclub in 1978 in San Francisco, California.
peopleDrummer Tommy was last surviving member of seminal band
Life and Style
Swimsuit, £245, by Agent Provocateur
fashion

Diving in at the deep end is no excuse for shirking the style stakes

PROMOTED VIDEO
Life and Style
Several male celebrities have confessed to being on a diet, including, from left to right, Hugh Grant, Benedict Cumberbatch and Ryan Reynolds
life...and the weight loss industry is rubbing its hands in glee
Voices
Spectators photograph the Tour de France riders as they make their way through the Yorkshire countryside
voicesHoward Jacobson: Line the streets for a cycling race? You might just as well watch a swarm of wasps
Life and Style
lifeHere's one answer to an inquisitive Reddit user's question
Arts and Entertainment
'Eminem's recovery from substance abuse has made him a more potent performer, with physical charisma and energy he never had before'
arts + entsReview: Wembley Stadium ***
Sport
Joe Root and James Anderson celebrate their record-beaking partnership
cricketEngland's last-wicket stand against India rewrites the history books
News
peopleDave Legeno, the actor who played werewolf Fenrir Greyback in the Harry Potter films, has died
Finacial products from our partners
Property search
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

    Information Security Manager (ISO 27001, Accreditation, ITIL)

    £70000 per annum: Harrington Starr: Information Security Manager (ISO 27001, A...

    Biztalk - outstanding opportunity

    £75000 - £85000 per annum + ex bens: Deerfoot IT Resources Limited: Biztalk Te...

    Trade Desk Specialist (FIX, Linux, Windows, Network Security)

    £60000 per annum: Harrington Starr: Trade Desk Specialist (FIX, Linux, Windows...

    Service Desk Analyst (Windows, Active Directory, ITIL, Reuter)

    £35000 per annum: Harrington Starr: Service Desk Analyst (Windows, Active Dire...

    Day In a Page

    Iraq crisis: How Saudi Arabia helped Isis take over the north of the country

    How Saudi Arabia helped Isis take over the northern Iraq

    A speech by an ex-MI6 boss hints at a plan going back over a decade. In some areas, being Shia is akin to being a Jew in Nazi Germany, says Patrick Cockburn
    The evolution of Andy Serkis: First Gollum, then King Kong - now the actor is swinging through the trees in Dawn of the Planet of the Apes

    The evolution of Andy Serkis

    First Gollum, then King Kong - now the actor is swinging through the trees in Dawn of the Planet of the Apes
    You thought 'Benefits Street' was controversial: Follow-up documentary 'Immigrant Street' has got locals worried

    You thought 'Benefits Street' was controversial...

    Follow-up documentary 'Immigrant Street' has got locals worried
    Refugee children from Central America let down by Washington's high ideals

    Refugee children let down by Washington's high ideals

    Democrats and Republicans refuse to set aside their differences to cope with the influx of desperate Central Americas, says Rupert Cornwell
    Children's books are too white, says Laureate

    Children's books are too white, says Laureate

    Malorie Blackman appeals for a better ethnic mix of authors and characters and the illustrator Quentin Blake comes to the rescue
    Blackest is the new black: Scientists have developed a material so dark that you can't see it...

    Blackest is the new black

    Scientists have developed a material so dark that you can't see it...
    Matthew Barzun: America's diplomatic dude

    Matthew Barzun: America's diplomatic dude

    The US Ambassador to London holds 'jeans and beer' gigs at his official residence – it's all part of the job, he tells Chris Green
    Meet the Quantified Selfers: From heart rates to happiness, there is little this fast-growing, self-tracking community won't monitor

    Meet the 'Quantified Selfers'

    From heart rates to happiness, there is little this fast-growing, self-tracking community won't monitor
    Madani Younis: Five-star reviews are just the opening act for British theatre's first non-white artistic director

    Five-star reviews are just the opening act for British theatre's first non-white artistic director

    Madani Younis wants the neighbourhood to follow his work as closely as his audiences do
    Mrs Brown and her boys: are they having a laugh?

    Mrs Brown and her boys: are they having a laugh?

    When it comes to national stereotyping, the Irish – among others – know it can pay to play up to outsiders' expectations, says DJ Taylor
    Gavin Maxwell's bitter legacy: Was the otter man the wildlife champion he appeared to be?

    Otter man Gavin Maxwell's bitter legacy

    The aristocrat's eccentric devotion to his pets inspired a generation. But our greatest living nature writer believes his legacy has been quite toxic
    Joanna Rowsell: The World Champion cyclist on breaking her collarbone, shattering her teeth - and dealing with alopecia

    Joanna Rowsell: 'I wear my wig to look normal'

    The World Champion cyclist on breaking her collarbone, shattering her teeth - and dealing with alopecia
    Bill Granger recipes: Our chef gives raw ingredients a lift with his quick marinades

    Bill Granger's quick and delicious marinades

    Our chef's marinades are great for weekend barbecuing, but are also a delicious way of injecting flavour into, and breaking the monotony of, weekday meals
    A History of the First World War in 100 Moments: Peace without magnanimity - the summit in a railway siding that ended the fighting

    A History of the First World War in 100 Moments

    Peace without magnanimity - the summit in a railway siding that ended the fighting
    Scottish independence: How the Commonwealth Games could swing the vote

    Scottish independence: How the Commonwealth Games could swing the vote

    In the final part of our series, Chris Green arrives in Glasgow - a host city struggling to keep the politics out of its celebration of sport