Why annuities aren't all bad

Pensions bookAnnuities have a bad reputation. They are perceived as not only poor value but as a way for insurance companies to pocket your hard-earned cash should you have the misfortune to live a short retirement.They have been put under further strain by historically low gilt yields which means the rate of annual income you are offered for your lump-sum pension cash is being pushed lower still.

But do annuities deserve all the bad press they receive? I don't think so.

For those who have saved a relatively small amount into a pension over their working life, and that includes the average pot of around £25,000, annuities are still the best way of turning your pension pot into a guaranteed income.

Granted the income may not be very much if your pension pot is small but it is still guaranteed no matter how long you live, and it could keep being paid to you well above the level of your original pension pot.

'But what about it I die before?' I hear you cry. Well, then you lose your money. What you have to remember is that annuities are effectively an insurance policy against the risk of you living too long. If you live too few years to claim the money back then of course the money will go to the insurance company – that's how insurance works, those who don't claim subsidise those who do.

If after a year you didn't claim on your car insurance, you wouldn't ask the insurer to refund you your premiums because you haven't used the insurance – the same principle applies to annuities.

Annuities are a great way for those with modest pension savings to make the best use of their cash, for them utilising income drawdown schemes (where your money remains invested and you take a yearly income from the investment) is just not an affordable option.

Consumers just have to make sure they shop around for the best annuity deal – you don't have to take the annuity offered to you by the insurance company that you have your pension with. This is known as utilising the Open Market Option, and could mean you are offered a much better rate of annual income.

You should also look into enhanced or impaired life annuities, which pay out increased income to those who have existing medical conditions or who impair their lives through bad diet or smoking.

Annuities may not be a perfect solution, but for many they are the best way for them to access a guaranteed income in retirement.

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