Sound Annuity Advice

She had already decided to take the maximum amount of tax free cash which was £30,000 (25% of the fund value) with the remaining fund used to provide a regular income. The main area that she wanted our advice on was how best to take the income from the remaining fund. Her existing income was derived from a part time job and the state pension and this was enough to maintain her normal living expenses but left very little extra for other expenditure that cropped up on a regular basis.

We discussed a conventional annuity where the residual pension fund would be used to purchase an income for the rest of her life. This kind of annuity can be set up on the basis of remaining level in payment or increasing each year perhaps in line with inflation. When we looked at the figures for the starting income of an inflation-linked annuity it was significantly lower than that for a level annuity. This of course is due to the annuity provider having to build in the cost of annual increases over the coming years.

The level annuity was more attractive from a starting income point of view but of course this would never increase in payment and Mrs R was in perfectly good health so could expect to live for perhaps another 20-25 years all being well. We pointed out the effects of inflation over a long period of time such as this and what this would mean to her standard of living in the future as her annuity lost value in real terms.

At this point we talked about the possible alternative of using an investment linked annuity which could offer a starting level of income that was higher than the inflation-linked conventional annuity but that had the possibility of increasing the income subject to investment returns. Mrs R was immediately attracted to this type of annuity as she could see that if investment returns were reasonable she could achieve an increasing income over the years as well as a starting income that was acceptable.

We had to slightly curb her keenness at this point, as there are some elements of an investment-linked annuity that should be considered before committing. Investment risk is the most crucial point to consider. Investment linked annuities can be directly linked to stock market movements or can be placed in an investment fund that is designed to smooth out the ups and downs of investment markets such as a with-profits fund. Being linked to investment returns whether smoothed or not of course does leave the possibility of the future income from the annuity going down as well as up.

After discussing the advantages and disadvantages of conventional versus investment-linked annuities Mrs R felt comfortable with the smoothed return option of a with-profits annuity and we recommended a plan from a suitably financially strong provider with a sound track record of investment success.

She left our meeting feeling happy that she had a good level of starting income but with the opportunity to achieve increases to this income over the years to offset the effects of inflation which could otherwise seriously damage her wealth in retirement.


 

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