Annuity Helper

Variable Annuity

The market for taking an income in your retirement – especially for pensions- has historically given people two broad options

1) Convert your pension to an annuity

2) Use an income drawdown plan

In recent years another option has arisen, a variable annuity.

Technically speak this term isn’t quite correct, as variable annuities are in fact not annuities. However the term is widely used as its easier for people to understand than the more accurate ‘guaranteed income drawdown plan’.

In the U.K. there is significant lack of awareness of variable annuities. The vast majority of people nearing retirement age are simply not aware of this option. Indeed according to recent U.K. government figures only 18% of the target audience for this option are even aware it exists. This is surprising as many industry analysts believe as much as 45% of the U.K.’s retirees would be financially better off using this option in retirement.

To illustrate how such annuities work, lets run through an example of these three options, looking at the advantages and disadvantages of each.

David Wells is nearing retirement, and has a pension pot of £100,000 he would like to convert to income. He is 64 years old, and his wife is 60. They have two sons and three grandchildren. David has some other income, but his main priority is to get a good income from the £100,000 fund.

Enhanced annuities (don’t confused with a variable annuity) are not applicable to David and his wife due to their good health. As they have good health, statistically David is likely to die approximately 8 years before his wife.

Option 1 – A Conventional Annuity

David would like an annuity that produces income for the rest of his life, and is guaranteed to run for for 10 years minimum. Should David die first, he would like the annuity to pay 50% of the income to his wife.

One observing the market, David discovers he can purchase an annuity with these features for £5,868 before tax. This figure is guaranteed for his life with a 10 year minimum. His wife will receive 50% of this figure following his death.

Advantages

- The income is fixed and guaranteed.

- If David lives a long time e.g. 106 this will likely represent good value.

Disadvantages

- Should his wife die first, the inbuilt Spouses Pension would reduce the value of his income.

- The income is fixed and does not keep up with inflation.

- Should David and his wife die within 10 years of taking the annuity the payment will continue from the starting point to his next of kin (likely his children). However once this 10 years is up the payments will stop, and the annuity provider will profit massively from the unfortunate early death of David and his wife.

- Unlike a variable annuity the income can be decreased or increased from one year to the next to reflect changes in circumstances.

This article is continued here

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