Q: What are the pros and cons of different annuities?
The big plus for annuities is that they provide a guaranteed income for life, according to Andrew Tully, pensions technical manager for MGM Advantage.
He said: “No matter how long an individual lives they know they will receive an income.”
Pros and cons really depend on what the clients needs are, what other assets or sources of income they have, and their attitude to losing income.
Conventional annuities come with no investment risk, according to Mr Tully.
However he said 97 per cent of conventional annuities are bought on a level basis so income doesn’t increase in any way.
Inflation will therefore cut the buying power of that income over time.
He said: “As many of us will now live 25 or 30 years in retirement this is a major issue.
“We estimate that a typical UK household where the main occupant is aged 65 to 74 would need to spend an extra £1,104.04 a year to maintain their standard of living from a year ago (this is based on the latest CPI rate of 5.2 per cent).”
A lifetime annuity (this includes enhanced or impaired annuities) guarantees an income for life, but Katherine Oxenham, business development director of Annuity Direct, said you have to choose the options at outset and cannot change them no matter how your circumstances change.
Unit-linked and with profit annuities offer the potential for an increasing income, but Ms Oxenham warned it can go down (although there is usually a guaranteed minimum amount payable no matter what).
Temporary annuities provide an income for a set period of time, paying a guaranteed maturity amount at the end.
Ms Oxenham said temporary annuities allow you to defer a decision about spouse or death benefits for example.
Indexation will assist in hedging against inflation however, investment-linked annuities involve exposure to investment risk, warned Mike Morrison, head of pensions development at Axa Wealth.
Underwritten annuities are likely to reflect an individual’s actual circumstances, he added.
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