Annuities
What is an annuity?
An annuity is a special investment sold by
insurance companies. It is a way of converting a lump sum,
usually the pension fund you have built up during your working
years, into an income during your retirement which is guaranteed
until your death. The type of annuity you choose at the outset,
and the benefits it provides, will affect the amount of income
you get, both initially and over the years. Because you can't
normally change your annuity once you've bought it, it is
vital to check all the options available so you buy the one
that best suits your needs.
Conventional annuities are simple, offer peace
of mind as the income is fixed and guaranteed until death.
However, they do lack flexibility. Once an annuity is purchased
you are locked in for life, as it cannot be changed. Annuities
are currently offering poor value and current rates are low
due to low interest rates and increased life expectancy.
They also offer limited death benefits, as there is no return
of capital to pass on to your spouse, family or dependents.
What different types of annuities are available? There are
different annuities to suit different needs, the most common
of which are
- Level
- Increasing
- Investment-Linked - (With Profit & Unit Linked);
and
- Impaired Life/Enhanced annuities Level
Level Annuity
A level annuity (sometimes called a 'conventional'
annuity) pays the same income year after year for the rest
of your life. The main drawback of a level annuity is that
what you can buy with the income at outset falls as prices
rise, i.e., it is affected by inflation. For example, suppose
at the start of retirement your weekly grocery bill is £50,
if inflation averages 3% a year for 15 years, their cost
would rise to almost £78 a week. If you could still
afford only £50, you would be able to buy fewer groceries.
Increasing
Increasing Annuity
An increasing annuity provides an income with
some protection against inflation. There are two main choices:
- escalating annuities where your income is guaranteed
to increase at a fixed rate each year, commonly by 3% or
5%.
- RPI-linked annuities where your income adjusts each year
to reflect changes in the Retail Prices Index (RPI) - the
main measure of inflation used by the government.
The main drawback with an increasing annuity,
is that the starting income is a lot lower than you would
get from a level annuity. For example, for a man age 65,
the starting income from a 5% escalating annuity might be
two-thirds or less of the amount from a level annuity. It
could take more than 10 years for the escalating income to
catch up, and nearly 20 years before the total you'd received
from the escalating annuity exceeded the total paid by the
level annuity.
Investment-linked annuities
This type of annuity offers the chance of a
higher income than you can get from level or increasing annuities
(often called 'conventional annuities') linked to fixed-interest
assets such as gilts and bonds. But you need to be comfortable
with linking your income in retirement to the ups and downs
of the stockmarket.
Investment-linked annuities are more risky than conventional annuities because:
- your income is likely to change each year, so could go
down as well as up;
- the size of any increase is unpredictable.
Investment annuities can either be 'with-profits'
or 'unit-linked'.
Impaired-life/Enhanced annuities
Some companies offer annuities which pay you
a higher-than-normal income if you have a health problem
that threatens to reduce your lifespan - these are called
'impaired-life annuities'. Relevant health problems might
include, for example, cancer, chronic asthma, diabetes, heart
attack, high blood pressure, kidney failure, multiple sclerosis
or stroke. It is quite possible that someone qualifying for
an impaired-life annuity could see there income improve by
as much as 30%*.
You might even qualify for an 'enhanced annuity' if you are overweight or smoke
regularly. Some companies even offer better rates to people who have followed
certain occupations, and to individuals living in certain parts of the country!
Questions
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Contact us by email or telephone on 0207 407
8787.
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