Overcoming the annuity nightmare

My colleague Catriona Lumiste posted a blog about annuities last week (well worth reading) and I was attracted to a letter in the Times last week headed ‘Annuity nightmare’.

The writer was very upset that he would be handing over his pension fund to an annuity provider in the form of an “interest free loan”.

He concluded this because he had calculated that with say 20 years left to live he would receive total annuity income that was pretty much equivalent to the value of the fund he was handing over to buy the annuity.

We all know that annuity rates are very poor at the moment but unusually for me I want to defend the annuity providers.

They are required to match the guarantees they provide for annuities (an annuity being a guaranteed stream of gross income for life) against a suitable basket of government securities – Gilts.

Gilt yields are historically low at least partly because of the Government policy of Quantitative Easing (QE) so I guess the writer really is venting his anger and frustration at Government rather than the annuity provider (although I could be wrong about that!)

I guess I want to make two comments;

-firstly, that people very often underestimate their life expectancy and the 20 years he quoted in his letter could well be a vast underestimate;

-secondly, an annuity is simply a form of insurance (really the reverse of life insurance) it is therefore a risk based purchase (and yes, insurance companies do make profit from them!)

My advice is to take advice.