An annuity is a guaranteed income for life
Buy an annuity and it will provide an income for as long as you live, says Paul Lewis
If you have money in your pension fund that you are drawing down or do not quite know what to do with, then you should consider buying an annuity with some of it, to give a solid bedrock income. An annuity is simply a guaranteed income for life. You give an insurance firm a lump sum and it promises to pay you a certain amount each year until you die.
Today, the best pays a healthy 65-year-old £7,140 a year in exchange for £100,000. If you buy an annuity at 75 you could get £9,500 a year for £100,000 – guaranteed for the rest of your life.
One problem with annuities is the fear that you will die just a few years after buying it, losing most of the money you spent. You can avoid that by taking a long guarantee period. At 65, your life expectancy is around 21 years. If you take out the annuity with a guarantee period of 20 years then even if you die earlier your heirs will continue to get the income for that time.
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If you live to 100 you will get the guaranteed income for those 35 years. The cost of a 20-year guarantee is currently 7% of the annual amount. So instead of £7,140 a year it would guarantee to pay £6,641 for 20 years. That means there is a guaranteed return of £132,820 on your £100,000. And at 65 there is a one in four chance of living 27 years and getting over £179,000. Of course, with inflation high these fixed amounts will be worth less as you age.
Some advisers recommend annuities that rise each year with inflation. That will mean your initial income is lower: for £100,000 you would get £4,443 in the first year, or £4,108 if you also have the 20-year guarantee. But that amount will rise annually with the highest inflation index, the RPI, which is currently 11.3% a year. So it will soon pay for itself if inflation remains high.
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Find the best annuity for you by using a good independent financial adviser who specialises in dealing with annuities and retirement income. To find more information online, search ons.gov.uk for ‘life expectancy’, moneyhelper.org.uk for ‘compare annuities’, or paullewismoney.blogspot.com for ‘find financial advice’.
QUESTIONS? Send any questions to Paul.Lewis@radiotimes.com. I cannot answer you personally, but I will reflect them in this column