You probably think that buying an annuity with your pension fund is a safe thing to do. Sure, you might not get the best price at the moment – what with the government’s obsession with keeping interest rates low to save the banks and house builders. But at least you’ve taken an option that will keep your money safe and you financially secure. However, this is, like most things peddled by the pensions industry, absolute nonsense.
As pensions expert Ros Altmann points out, if you buy a standard annuity in your 60s, you’re taking a huge gamble. You are betting that you will live a long life. If you don’t buy an annuity, and you die before you are 75, your fund passes to your family tax-free. But if you do buy an annuity, and you die soon afterwards, it’s gone – “you lose most of your pension savings”.
You are also taking a bet on future inflation: if you buy a standard annuity instead of an inflation-linked one, you will lose purchasing power every year. Live for 30 years after you make the decision to buy, and – given the endless inflation in Britain – you might well find that having an annuity doesn’t make you much better off than not having one. Another thing that people often forget is that buying an annuity is a one-off deal: however much rates might go up later, you won’t ever get a new deal. It’s final.
But what of the one thing an annuity does protect you against – living longer than expected? The truth is, says Altmann, that to get value out of your annuity, you really do have to live a pretty long time. Buy an annuity at 65 and you have to live until at least 82 just to get your money back in nominal (ie, ignoring inflation) terms, and that’s without the interest or investment returns that the insurance company will have earned on it.
Look at it like this and all of a sudden it doesn’t seem that safe an option, does it? Of course, none of this is to say that buying an annuity is automatically a bad idea – just that those who buy them early are often taking many more risks than they realise.
The answer? If you are able to do so, consider delaying buying an annuity until after you turn 75, and certainly take professional advice before you buy. One of the oddities of the annuity market is that, even if you buy direct, you are often charged commission anyway. If you have to pay regardless, you might as well get something for your money.
Check whether you qualify for an enhanced annuity (where you can get more money if you are likely to die earlier than average). And don’t leave your partner in the lurch if you die before they do – a joint annuity doesn’t cost much more than a sole one.