I am 70 years old, in reasonable health and currently have a pension pot of £222,000.
This pension is with Aviva and I draw down £1,000 per month.
I believe my pension fund has done reasonably well and fallen around £33,000 since I started to draw down six years ago.
Retirement plan: I live off a successfully invested £220k pension fund, but should I buy an annuity? (Stock image)
My wife has a small private pension as well valued at £42,000 of which she draws down £350 per month.
We both receive state pensions. My question is when or should I change to an annuity.
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Steve Webb replies: I’m pleased to see that you and your wife have been able to enjoy the flexibility that comes from the ‘pension freedoms’ reforms, dipping into your pension pot as required and leaving the balance to be invested.
I was particularly impressed to see that although you have been taking out regular amounts and despite some rocky market movements in the last year, the balance in your pot is holding up pretty well.
But you are quite rightly looking ahead to a time in your life when you might value greater certainty, and considering whether to exchange some of your savings for a guaranteed income from an insurance company.
Did you miss out on a state pension lump sum if you were widowed?
This is Money’s columnist Steve Webb calls on elderly widows who might have missed out on a backpayment when their husbands died to get in contact.
He wants to help people get money that is rightfully theirs, and find out if there is a systematic problem not picked up in the Government’s massive correction exercise for elderly women who were underpaid.
Find out if you could be affected, and how to contact Steve here.
> Did you miss out on state pension if you were widowed in retirement?
The big advantage of using some of your savings to buy an annuity (a guaranteed income) is that it can take away one of the big uncertainties which you face, namely how long each of you will live.
Once you take out an annuity, it will continue to pay out, even if you happen to live into your 90s or beyond, so you don’t need to worry about your money running out.
The exact amount of regular income you will get depends on market rates (annuity rates had been very low for many years but have risen considerably in the last 12 months), how old you are, and whether you are in good health.
To give an example, a typical 70 year old in average health might currently get around £6,300 per year for a standard annuity bought with a £100,000 pension pot.
As you get older, the annuity rate offered will go up, with a typical 75 year-old being offered around £7,000 per £100,000 of pot and an 80 year-old being offered around £8,300.
Interestingly, the annuity rate should be the same for a man or a woman, because it is now illegal for the insurer to discriminate between men and women.
Given that a woman is likely to live longer on average, you might want to consider whether it should be your wife rather than yourself who buys any annuity.
Another advantage of this would be if your wife was paying income tax at a lower rate than you, as annuity payouts are subject to income tax.
There are also different types of annuity that you can buy. Some of the key choices you will want to consider (each of which would reduce the annuity rate payable) are:
– Do I want a ‘guarantee’ period, which means that even if I die soon after buying the annuity there will still be a minimum payout?
– Do I want my annuity to rise each year to take (some) account of inflation?
– Do I want the annuity to pay a regular income to my spouse after I die?
In all cases, you should shop around (using an annuity comparison site or a financial adviser) for the best value annuity.
You should make sure it takes full account of any health conditions which you have when you take it out.
There are, of course, downsides to buying an annuity. Once you’ve handed a lump sum over to an insurance company it is no longer there to be passed on to your heirs (apart from any ‘guaranteed payment’ offered by the insurer).
Similarly, money allocated to an annuity is no longer available to be invested and the rate of return you get on an annuity is likely to be lower than you could get by taking some investment risk.
Returning to your original question, the ‘right’ time to buy an annuity (if at all) is likely to be different for every individual.
If you or your wife find yourself getting anxious about market movements and want greater certainty as you get older, then the modest but certain return from an annuity could be attractive.
You may also want to consider whether your ability to make complex financial decisions about your drawdown pot will decline as you get older and whether buying an annuity will relieve you of that burden.
Research which my firm LCP has undertaken has suggested that for many people the best time to buy an annuity might be in your late 70s or early 80s but I should stress that this is based on general modelling and the right answer for any individual will depend on their specific circumstances such as health, attitude to risk, and desire to leave an inheritance.
Ask Steve Webb a pension question
Former Pensions Minister Steve Webb is This Is Money’s Agony Uncle.
He is ready to answer your questions, whether you are still saving, in the process of stopping work, or juggling your finances in retirement.
Steve left the Department of Work and Pensions after the May 2015 election. He is now a partner at actuary and consulting firm Lane Clark & Peacock.
If you would like to ask Steve a question about pensions, please email him at firstname.lastname@example.org.
Steve will do his best to reply to your message in a forthcoming column, but he won’t be able to answer everyone or correspond privately with readers. Nothing in his replies constitutes regulated financial advice. Published questions are sometimes edited for brevity or other reasons.
Please include a daytime contact number with your message – this will be kept confidential and not used for marketing purposes.
If Steve is unable to answer your question, you can also contact MoneyHelper, a Government-backed organisation which gives free assistance on pensions to the public. It can be found here and its number is 0800 011 3797.
Steve receives many questions about state pension forecasts and COPE – the Contracted Out Pension Equivalent. If you are writing to Steve on this topic, he responds to a typical reader question about COPE and the state pension here.