Many lifetime annuities offer fair value for money according to new research by Jonquil Lowe of the True Potential Centre for the Public Understanding of Finance at The Open University Business School.
The report, which has been published recently by the International Longevity Centre UK (ILC-UK), also argues that the protection against longevity risk may be poorly understood by consumers.
Falls in annuity rates over the past 25 years mean that an individual, who wanted to start retirement with a nominal income of £10,000, would have needed a pension pot of £65,000 in 1990, but over £175,000 by 2013.
This has led to a commonly held view that annuities are a bad investment, which overlooks the insurance value of annuities, particularly in the face of increasing longevity.
Research
The research confirms that the major determinants of annuity rates are life expectancy and long-term interest rates.
The fact is that we are all living longer, and from an actuarial viewpoint, this is a finance risk that needs to be factored into how much is paid out by an annuity each year. If you are in the position of considering whether to buy an annuity then the simple answer is shop around – do not take the first quote offered to you as it may represent poor value for money.
Also, if you have pre-existing medical conditions that may affect your life expectancy then declare them – as they could help you receive a higher income from your annuity as your life expectancy is shorter. If you are in any doubt, or unsure what to do, then contact an independent financial adviser who will be able to assist you.
