Pension Company Lump Sum

 
Pension Annuity Phone Number : 0845 83 87 811
Best Pension Annuity Home Seperator Free Quotes Seperator Pension annuity seperator Tax Free Cash Seperator income drawdown seperator pension lump sum seperator annuities abroad seperator
Annuties and Retirement Products for Customers Overseas
Best Pension Annuity Social Media Visit the Best Pension Annuity page on Facebook Best Pension Annuity on Google+ Learn about Annuities and Drawdown on our YouTube Channel Business Connections
 
Best Pension Annuity is a trading style of Platinum Financial Consulting    
AUTHORISED & REGULATED BY THE FINANCIAL CONDUCT AUTHORITY    
 
Income Drawdown Customer Protection  
 
Check us now on the FCA Register. Number 227014
   
Pension Fraud Protection  

What is best, a level or index linked annuity ?

It is important to say that in the world of retirement planning there are very few absolute answers. What is right for one customer may be entirely inappropriate for another. We often say to customers that they will only really know what the best option would have been, once they have died !!!

However when it comes to comparing an indexed-linked annuity to one that pays a level premium, there is a compelling argument that leads many people to select a level annuity, when they are able to compare the figures.

Before we discuss this further it is worth explaining the key difference between the two annuity types. A Level annuity will pay you the same income each year for your entire life, it won’t go up and it won’t go down either. An index linked annuity will increase each year in line with a fixed percentage, say 3% or an index such as the Retail Price Index (RPI). The index linked annuity aims to increase roughly in line with inflation, this means that the spending power of the annuity is not eroded by inflation. A good idea ? Yes ? – No ?

There is a price to be paid for selecting an index-linked annuity. The starting income for an index-linked annuity will be lower than a level annuity purchased with the same fund value. We can explain this better by looking at some quotes we recently produced for an actual customer.

Our customer was aged 63. After taking tax free cash he was left with a fund of £139,500 to purchase an annuity. He wanted the annuity to pay 60% of any income he would receive to his wife, should he die before her. He was uncertain whether to take a level or index linked annuity, we were therefore happy to get quotes for both a level annuity and another that would increase by 3% per annum (although this particular policy would increase by whatever RPI happened to be). We also provided a table for him, which is produced below, which showed the overall financial impact of the decision he faced.

 

AGE
YEAR
LEVEL
ANNUITY
INDEXED
ANNUITY
DIFFERENCE
CUMULATIVE
DIFFERENCE
63
1
£9,106.00
£5,923.00
£3,093.00
£3,093.00
64
2
£9,106.00
£6,100.69
£2,915.31
£6,008.31
65
3
£9,106.00
£6,283.71
£2,732.29
£8,740.60
66
4
£9,106.00
£6,472.22
£2,543.78
£11,284.38
67
5
£9,106.00
£6,666.69
£2,349.61
£13,633.99
68
6
£9,106.00
£6,866.38
£2,149.62
£15,783.61
69
7
£9,106.00
£7,072.37
£1,943.63
£17,727.24
70
8
£9,106.00
£7,284.54
£1,731.46
£19,458.69
71
9
£9,106.00
£7,503.08
£1,512.92
£20,971.61
72
10
£9,106.00
£7,728.17
£1,287.83
£22,259.44
73
11
£9,106.00
£7,960.02
£1,055.98
£23,315.43
74
12
£9,106.00
£8,198.82
£817.18
£24,132.61
75
13
£9,106.00
£8,444.78
£571.22
£24,703.83
76
14
£9,106.00
£8,698.13
£317.87
£25,021.71
77
15
£9,106.00
£8,959.07
£56.93
£25,078.63
78
16
£9,106.00
£9,227.84
£211.84
£24,866.79
79
17
£9,106.00
£9,504.68
£488.68
£24,378.12
80
18
£9,106.00
£9,789.82
£773.82
£23,604.30
81
19
£9,106.00
£10,038.51
£1,067.51
£22,536.79
82
20
£9,106.00
£10,386.02
£1,370.02
£21,166.77
83
21
£9,106.00
£10,697.60
£1,681.60
£19,485.18
84
22
£9,106.00
£11,018.52
£2,002.52
£17,482.65
85
23
£9,106.00
£11,349.08
£2,333.08
£15,149.57
86
24
£9,106.00
£11,689.55
£2,673.55
£12,476.02
87
25
£9,106.00
£12,040.24
£3,024.24
£9,451.78
88
26
£9,106.00
£12,401.45
£3,385.45
£6,066.33
89
27
£9,106.00
£12,773.49
£3,757.49
£2,308.84
90
28
£9,106.00
£13,156.69
£4,140.69
£1,831.85
91
29
£9,106.00
£13,551.40
£4,535.40
£6,367.25
92
30
£9,106.00
£13,957.94
£4,941.94
£11,309.19
RED Numbers = Income lost if level annuity is not selected

As you can see, even though exactly the same amount of money was used to purchase the annuity, there is over £3,000 per annum difference between the two annuities. The level annuity will pay our customer £9,0136 per annum, it will pay him exactly this amount each year for as long as he lives.

The index-linked annuity will pay him an income of £5,923 in his first year, however as it increases by 3% each year, in the second year it will pay him £6,100.69. The questions / gambles with the index –linked annuity are :


How old will you be before the index-linked annuity catches up with the level annuity ?

How old will you be before the all the income from the index-linked annuity is worth more than all the income from the level annuity ?

How likely do you think it is you will live to either age ?

What are the risks if you don’t live as long ?

In this real life case the income from the index-linked annuity will not catch up the income from the level annuity until the customer is aged 78. At this point they would have received over £25,000 less than they would have got had they chosen the level annuity.

The customer would have to live to 90, before the all of the income received from index-linked annuity was worth more than all of the income from the level annuity. Assuming the customer lives beyond the age of 90 then the index-linked annuity was a financially astute decision.

If the customer dies before the age of 90 then it could be that they would have got more income in total if they had selected the level annuity, however this will depend on many things.

This customer’s wife is two years younger than him, and she will get 60% of his income should he die before her. However our assessment is that if the customer died at age 78, then given the reduced income his wife would receive, it is highly unlikely that the total income received from the index-linked annuity would even be more than the combined income from the level annuity.

When presented with figures like this (which are typical), it is hardly surprising that many customers choose to take a level annuity. However a customers’ individual circumstances may lead them to believe that they are still nevertheless better served by an index-linked annuity – as proved to be the case with this particular customer.

 
 


 
Click here for FREE quotes
 
Annuity Quotes delivered to your inbox
Annuity Couple

Want to compare the difference between level and index-linked annuities ?

Simply use our quote request form and we will send you personalised quotes and a comparison chart direct you your inbox

index-linked panel right
Annuity Text Box
left side of annuity panel Get annuity quotes now annuity beach divider Ask us a question about annuities
Annuity spacer
spacer for annuity
Request a FREE callback Get a Free Guide to pensions and annuities.
pension annuity beach auuity quotes online
 
Download our Free Guide to taking a Lump Sum from your pension
Pension Lump Sum Guide
See our FREE Guide, for everything you need to know about taking Tax Free Cash from a pension.
Delivered instantly to your email inbox
Pension Lump Sum Right
Download your guide now
Get you Free Guide Now Pension Lump Sum guide on iPad
Lump Sum Beach
 
 
Published : 31st October 2013    
Author : Bob Cook    
Annuity or Tax Free Cash Footer
ABOUT US | INITIAL DISCLOSUREFREE ANNUITY GUIDE | TERMS & CONDITIONS | PRIVACY POLICY | CONTACT US | SITEMAP | NEWS |  BLOG

Cookies Policy : The website does not use cookies and nothing is downloaded to your PC or Device

The information contained on this website is for information purposes only.

This website DOES NOT contain personal advice based on your circumstances.

Platinum Financial Consulting
The Old School House, East End Road
Bradwell-on-Sea, Essex, CM0 7PY

Telephone : 020 33 55 4827           Fax : 0871 277 1422           Email : info@platinumifa.co.uk

AUTHORISED AND REGULATED BY THE FINANCIAL CONDUCT AUTHORITY

Copyright © 2009 & 2017 Platinum Financial Consulting

FCA Registration Number : 227014

Keep up to date with annuity rate changes and other retirement issues  
If you are nearing retirement keep up to date with annuity rate changes by subscribing to our news feed

Pension Annuity Specialists