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 'no-hang up' scam targets vulnerable people - and your bank may not protect you
Budget 2015: George Osborne is set to get tough with further cuts in public spending
Bargain Hunter: Our exclusive deal cuts the cost of buying foreign currency by 20 per cent
Five Questions On: GB Energy's new tariff
Simon Read: You're guilty until proven innocent when HMRC sends in the tax credit detectives
- 1 Humans of New York image of crying gay teen receives best response from Ellen DeGeneres
- 2 People all over the world are getting semicolon tattoos to draw attention to mental health
- 3 Greek debt crisis: Yanis Varoufakis's funniest (and most memorable) quotes
- 4 The biggest first date turnoff has been revealed
- 5 Swedish minister gives strongest case yet on why EU should stop turning away asylum seekers
More Britons believe that multiculturalism makes the country worse - not better, says poll
Osborne to cap family benefits at £23,000 – announced ahead of his post-election Budget
Nathan Collier: Montana man inspired by same-sex marriage ruling requests right to wed two wives
Greece crisis: IMF was pushed around by Angela Merkel and Nicholas Sarkozy – and now it is being humiliated
Forget little green men – aliens will look like humans, says Cambridge University evolution expert
Girl, 7, stares down hate preacher at Ohio festival with pro-LGBT rainbow flag gesture
iJobs Money & Business
competitive: SThree: Are you passionate about sales?Do you have a keen interes...
£17000 - £30000 per annum: Recruitment Genius: This is an exciting opportunity...
£15000 - £17000 per annum: Recruitment Genius: This company offers a range of ...
£15000 - £16000 per annum: Recruitment Genius: Customer Service Advisors are r...
Day In a Page
This three-bedroom stone-built cottage currently trades as the village store with a restaurant in the annexe and family accommodation on the upper floors.
Previously two semi-detached properties, this five-bedroom home is spread over three floors with a large breakfast kitchen, orangery, office and gym on the second floor.
This five-bedroom home enjoys countryside views over the Blyth estuary to Southwold, offering flexible living space with a ground-floor annexe - ideal for use as a holiday let.
Close to the market town of Eye, this four-bedroom detached home offers a double-height living room which takes the place of the original, 19th-century, chapel nave.
Dating back to the 19th century, this four-bedroom home needs modernising. Spanning three storeys, the red-brick house has a fireplace, a small terrace and a cellar.
Just outside of Cambridge, this single-storey home offers three double bedrooms, a living room with vaulted timber ceiling and ladder steps that lead to a mezzanine study area.
This six-bedroom Georgian home is on three floors with open fireplaces, a two oven Aga, an annexe, and cottage gardens with outbuildings and a car barn.
A former coach house, Glebe Farm Stable is now a three-bedroom cottage with a double car barn, an attached office, kennels and an outbuilding that's currently used as a gym.
Located beside an impressive Victorian viaduct, this four-bedroom home has an open-plan living area that is glazed on two sides, with skylights and high ceilings.
A former furniture workshop, this three-bedroom home has high ceilings and painted brick walls, in a village setting only fifteen miles from the coast.
This five-bedroom stone townhouse features a pine staircase and an Inglenuk fireplace, double doors from the lounge give access to an enclosed courtyard.
This five-bedroom, detached home blends traditional and modern design; the sleek kitchen features a gas hob and oven set within an exposed chimney breast.
Moored in Chelsea's Cheyne Walk, this houseboat offers two double bedrooms and a teak deck that's ideal for al-fresco dining.
Surrounded by woodland, this five-bedroom manor house has plenty of outdoor storage space in the form of three converted loose boxes, two smaller outhouses and a woodstore.
This six-bedroom home is set amongst three acres of grounds. Currently a large family home, Clift Hill has potential to make a B&B or countryside retreat, subject to change of use permissions.
This Grade II-listed three-bedroom home is situated on a private road, just a short walk from the sandy beaches of Frinton-on-Sea.
Less than five miles from Malmesbury, this four-bedroom cottage comes with equestrian facilities and gardens that extend to approximately three acres.
Spanning three storeys, this late-Victorian five-bedroom farmhouse is a spacious family home with a modern interior and B&B potential.
With an original church arch, this triplex one-bedroom church conversion has a light, spacious, feel and comes with a secure off-street parking space.
This recently-refurbished three-bedroom home has bi-folding doors that lead out to a decked seating area - ideal for alfresco dining this summer.
Well-located for coastal walks and popular restaurants, this detached four-bedroom home offers views over farmland, to the Solent, the Purbecks and Bournemouth.
If you love high ceilings, school conversions like this one are bang on the money. This two-bedroom flat is minutes from Burgess Park and the foodie haven at Borough Market.
Set within a church conversion in Bermondsey, this two-bedroom maisonette combines existing features, such as original arches and brickwork, with a contemporary finish.
In the pretty market town of Bungay, this grade II-listed Mill House is arranged over four floors, offering four bedrooms and three reception areas.
This four-bedroom Edwardian home offers a combination of original features and contemporary design after a renovation by the current owners.
This four-bedroom home offers a vaulted ceiling in a breakfast room that's ideal for summer entertaining with doors that open to the patio and garden.
On the market for the first time in more than 50 years, this six-bedroom home is a project with vast potential - spread over three floors of living space.
This five-bedroom home comes with a range of outbuildings including a large barn which could be converted into a self-contained granny-flat or rental.
Surrounded by rolling countryside, this four-bedroom barn conversion comes with a self-contained, one-bedroom annexe that could serve as an office or a holiday let.
Located near Harrogate town centre, this five-bedroom Victorian terrace is arranged over three storeys while a current study serves as an optional sixth bedroom.
A ground-floor flat in a country house, located a mile from Sway; this two-bedroom home would make an ideal weekend retreat on the edge of the New Forest.
On a popular residential lane in Caterham on the Hill, this four-bedroom family home offers a secluded garden and a convenient location for local schools and public transport.
Just a short walk from Westerham green, this three-bedroom cottage has a light kitchen with exposed brickwork and double doors that lead to a south-facing garden.
In a prime spot opposite the River Thames, this one-bedroom flat has an 18sq ft reception room with glass doors that open out to a private terrace.
Set in the hills above Llanwrda Village, west Wales, this 18th-century three-bedroom farmhouse has holiday-let potential from a separate barn conversion and annexe.
This charming end-of-terrace townhouse is arranged over three floors, with two double bedrooms and a private courtyard garden located at the rear of the property.
Located in the University area, this semi-detached five-bedroom home is arranged over three floors - there's even a rear garden and off-road parking too.
Only a few minutes' drive from the charming town of Marlow, this two-bedroom home sits on the private riverside estate of Harleyford.
This detached four-bedroom home in Middleyard is arranged over two floors, with features that include a wood-burning stove and bespoke oak staircase.
In a row of eight detached Georgian residences, this five-bedroom home offers views of The Sound, Mount Edgcumbe and Cornwall from its impressive veranda and full-length balcony.
If you love cooking for friends this two-bedroom flat - complete with views of the iconic Battersea Power Station and an open-plan kitchen/dining area - will go down a treat.
Located above Grasmere village, this five-bedroom home is arranged over three floors and offers countryside views across Grasmere Lake towards Silver Howe.
This four-bedroom detached home comes with a double carport, useful workshop, garden and two walkways that offer views of the adjacent countryside.
With space for an equestrian business, a greenhouse for growing your own veg, a wine store and a gym; this five-bedroom home has all the ingredients for a country retreat.
The decked roof terrace of this two-bedroom flat is perfect for summer drinks while large windows and ample storage space make for a light and spacious interior.
Set sail for this four-bedroom farmhouse in Cowes. With five acres of land and an indoor pool, this home oozes character. There is even potential to let a one-bedroom annexe.
Surrounded by approximately 15 acres of grounds, this six-bedroom grade II-listed home has been extensively refurbished yet retains many period features.
This four-bedroom home comes with a two-bedroom cottage and commercial office, with planning to extend, in a stunning courtyard setting.
In a pretty Norfolk village, this four-bedroom family home is surrounded by landscaped gardens, with even a self-contained annex for guests.
A few miles from the seaside at Perranporth, this four-bedroom farmhouse sits amongst nine acres of idyllic grounds - including a lake and two barns used as holiday lets.