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.

Independent Partners; request a free guide on NISAs from Hargreaves Lansdown

peoplePaper attempts to defend itself
voicesWe desperately need men to be feminists too
Life and Style
food + drink
Arts and Entertainment
British actor Idris Elba is also a DJ and rapper who played Ibiza last summer
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

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

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    IT Project manager - Web E-commerce

    £65000 Per Annum Benefits + bonus: Clearwater People Solutions Ltd: If you are...

    Trainee / Experienced Recruitment Consultants

    £20000 - £25000 per annum + OTE £40,000: SThree: SThree are a global FTSE 250 ...

    Trainee Recruitment Consultant - Soho

    £20000 - £25000 per annum + OTE £40000: SThree: As a Recruitment Consultant, y...

    Trainee Recruitment Consultants - Banking & Finance

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

    Day In a Page

    Secret politics of the weekly shop

    The politics of the weekly shop

    New app reveals political leanings of food companies
    Beam me up, Scottie!

    Beam me up, Scottie!

    Celebrity Trekkies from Alex Salmond to Barack Obama
    Beware Wet Paint: The ICA's latest ambitious exhibition

    Beware Wet Paint

    The ICA's latest ambitious exhibition
    Pink Floyd have produced some of rock's greatest ever album covers

    Pink Floyd have produced some of rock's greatest ever album covers

    Can 'The Endless River' carry on the tradition?
    Sanctuary for the suicidal

    Sanctuary for the suicidal

    One mother's story of how London charity Maytree helped her son with his depression
    A roller-coaster tale from the 'voice of a generation'

    Not That Kind of Girl:

    A roller-coaster tale from 'voice of a generation' Lena Dunham
    London is not bedlam or a cradle of vice. In fact it, as much as anywhere, deserves independence

    London is not bedlam or a cradle of vice

    In fact it, as much as anywhere, deserves independence
    Vivienne Westwood 'didn’t want' relationship with Malcolm McLaren

    Vivienne Westwood 'didn’t want' relationship with McLaren

    Designer 'felt pressured' into going out with Sex Pistols manager
    Jourdan Dunn: Model mother

    Model mother

    Jordan Dunn became one of the best-paid models in the world
    Apple still coolest brand – despite U2 PR disaster

    Apple still the coolest brand

    Despite PR disaster of free U2 album
    Scottish referendum: The Yes vote was the love that dared speak its name, but it was not to be

    Despite the result, this is the end of the status quo

    Boyd Tonkin on the fall-out from the Scottish referendum
    Manolo Blahnik: The high priest of heels talks flats, Englishness, and why he loves Mary Beard

    Manolo Blahnik: Flats, Englishness, and Mary Beard

    The shoe designer who has been dubbed 'the patron saint of the stiletto'
    The Beatles biographer reveals exclusive original manuscripts of some of the best pop songs ever written

    Scrambled eggs and LSD

    Behind The Beatles' lyrics - thanks to Hunter Davis's original manuscript copies
    'Normcore' fashion: Blending in is the new standing out in latest catwalk non-trend

    'Normcore': Blending in is the new standing out

    Just when fashion was in grave danger of running out of trends, it only went and invented the non-trend. Rebecca Gonsalves investigates
    Dance’s new leading ladies fight back: How female vocalists are now writing their own hits

    New leading ladies of dance fight back

    How female vocalists are now writing their own hits