THE comedian Dave Allen once said: “If I could ask God just one question, it would be: Where am I going to die? Then I wouldn’t go there.” He would be certain he wasn’t going to die.
It’s a nice introduction to this week’s topic: the need for certainty and security in retirement.
More specifically, the certainty that we will be comfortable, and not have to worry about our money running low, no matter how long we live. This is important, because the retirements we have to fund are getting longer: the Pensions Policy Institute (PPI) tells us that in the last 40 years alone, our life expectancies have increased by six years.
Now they are, on average, in the low 80s, but those are just the averages; many of us are living longer, and more and more of us are living to get our telegram from the Queen when we turn 100.
We’re like wasps at a picnic – they can’t get rid of us at all.
Meanwhile, income guarantees have become an endangered species. Final salary pensions, where you were guaranteed an income based on your salary at retirement combined with your years of service, are being phased out. Hence the resurgence of interest in pensions annuities, that set of insurance policies that takes our pension lump sum and turns it into just what we seek: a guaranteed income for life.
Before we look at the main types of annuity you can have, let’s debunk one myth about annuities. An annuity doesn’t have to be an alternative to income drawdown from your pension. You can purchase an annuity with part of your pension savings, and keep the rest to dip into (‘draw down’) as you wish. One does not exclude the other, no matter what people’s impression has been in the past.
Another point is that your option to ‘shop around’ for your annuity, rather than taking the first one offered to you by your pension company, is a legal right known as your ‘open market option’ or OMO. Given that a great annuity can mean 30 per cent more income in your retirement, then OMO is the way to go.
First there is the choice between a single life or joint life annuity. The single life annuity stops paying out when you die, but the joint life annuity will go on paying out a portion of your payments (usually about half) to your spouse, civil partner or another dependent after you die, for an agreed term.
A nominee annuity is similar, but the portion paid out to your partner after you die is a new annuity with different terms and conditions, and your provider has to agree to this.
You can have a fixed or level annuity, which pays out the same amount every year, or an escalating annuity, which slowly increases. It can increase by an agreed amount, say 3 per cent a year, or it can be index-linked to rise in step with inflation – and with inflation at 9 per cent this year, I think we can all see the sense in that.
You can set up your annuity with a guarantee period. This means that, if you pop your clogs shortly after taking the annuity, so that it has paid out very little to you, it can be set to continue paying out to your family for an agreed time, for instance 10 years, but up to 30 years.
And did you know that the annuity is the only financial product where being in bad health actually gets you more dosh? This brings us to enhanced and impaired annuities.
If you have a health condition, the actuaries at your annuity provider, cheerful chappies that they are, conclude that you won’t be around forever, and so they offer you more money today, as you won’t be claiming for as long as a healthy person.
Typical conditions that qualify include diabetes, asthma, heart disease, high blood pressure, cancer, kidney failure, or just bad lifestyle choices like smoking or heavy drinking. It’s worth asking about – an enhanced annuity can get you up to 30 per cent more compared to the standard annuity.
The impaired annuity is for those who are more seriously ill, and if you really are in the departure lounge, the impaired annuity can be very generous indeed.
These are just some of the things you can do with an annuity, to ensure a guaranteed income in retirement, no matter what stock market volatility or runaway inflation may bring.
So don’t ever let anyone tell you pensions and annuities are boring. We financial advisers get quite excited by them. Why? Because pensions mean a comfortable retirement. Annuities mean money. And money, my friends, is NEVER boring.
:: Michael Kennedy is an independent financial adviser and pensions specialist and can be contacted on 028 71886005. Further information on Facebook at Kennedy Independent Financial Advice Ltd or at www.mkennedyfinancial.com
