February 11, 2013

Buy an index-linked annuity and live to 98!

In December pension consultants Hymans Robertson carried out a computer analysis of pension annuities.  They put forward the cases of two pensioners aged 65, with the same size pension “pot”.  One buys a flat-rate annuity – so his pension income remains the same throughout the remainder of his life – and the other buys an index-linked annuity – so the pension income rises to keep pace (within limits) with inflation.

The astonishing result is that if inflation averages 3% a year (not an unreasonable figure, given the last 20 years), the pensioner who buys the index-linked annuity will have to live to the age of 98 before the total amount he draws as pension exceeds the total amount drawn by the pensioner who buys the flat-rate annuity.

The reason for this is that annuity providers are now quoting starting figures for index-linked annuities about 40% lower than the figure for flat-rate annuities.

Now consider average life expectancy for a 65-year-old man, which the Office for National Statistics tells us is, in 2013, just over 21 years.  Also consider if you were aged 65 whether you would want a pension 40% higher now, or when you reach the age of 98.

I’d call it a no-brainer, if that wasn't just a little ageist . . . . .

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