‘Annuities? I don’t think so!’
This was the reaction of one of our clients, when we were discussing their income in retirement.
If you’ve not heard the term before, an annuity is a guaranteed income for life, which you buy from an insurance company with your pension fund. Most people who are not lucky enough to have a final salary pension (and that is likely to be most of us in the future) end up buying a life insurance annuity.
Essentially, you swap your hard-earned lump sum for a guaranteed income for life. So, for example, a lump sum of £100,000 may buy you an income of £6,000 a year for the rest of your life, no matter how many or how few years that may be.
But why does a life insurance annuity give you such a poor return on your money? There are two main reasons: increased life expectancy and the return on Government bonds (otherwise known as Gilts). When calculating how much to pay out on a life insurance annuity, the insurance company will calculate how long you are likely to live and what the return will be on a “safe” investment such as UK Government bonds. As we are all now living longer (1) and the return on UK Government Bonds is at a level last seen in Victorian times, it means life insurance annuity rates are painfully low. (2)
However, there are a couple of things you can do to boost your retirement income. In effect (and this has a connection with our recent article about the lottery!) when you buy a life insurance annuity, you effectively make a bet with the insurance company on how long you will live. If you live a long time, the insurance company loses out because you get more money, but if you die early, before you have recouped the amount of your lump sum, they ‘win’. This is one reason we usually advise clients to buy a five year guarantee so at least if you fall under the fabled bus shortly after buying your life insurance annuity, your estate will continue to receive payments for five years.
You can also tip the odds in your favour in a number of ways; firstly by shopping around and secondly by seeing if you qualify for an enhanced life insurance annuity. An enhanced annuity is one that will pay out more money if you have any one of a number of medical conditions.
We’ve found that a lot of people haven’t realised they qualify for an enhanced annuity, but it’s certainly something worth checking. People with raised blood pressure, increased cholesterol, heart conditions, diabetes, smokers or those who are overweight can usually qualify.
Taking independent advice to see if you could qualify for an enhanced annuity will cost you at most a few hundreds of pounds and could well cost nothing at all. In return, you could get many thousand pounds of extra income over your lifetime.
A recent survey conducted by Partnership, who are a leading provider of Enhanced annuities, showed an average increase of over 23% in enhanced annuities over standard annuities – that’s nearly an additional £1 in every £4 for your retirement income.(3)
Put another way, it means that a £50,000 lump sum might buy you £3,000 a year income with an ordinary life insurance annuity, but that same £50,000 could get you just under £4,000 a year with an enhanced annuity. Added up over the years, this makes for a lot of extra income in your retirement. What could you do with almost £1,000 a year extra? Maybe a holiday, maybe gifts for your family, maybe just a few extra luxuries.
Our conclusion here is that if you’re considering, or even not considering, a life insurance annuity, talk to your independent financial adviser. Ask your adviser to find out if you qualify for an enhanced annuity on medical grounds and you could be considerably better off in your retirement. So if you’re thinking ‘annuities? I don’t think so!’ maybe think again.
For a free and confidential discussion about buying an annuity, call Andrew Stallard on 0845 230 9876 or e-mail firstname.lastname@example.org.