Are annuities worth it?

By THIS IS MONEY
Updated:

 

WHY do annuities pay such low rates? According to one annuity table, a £100,000 pension pot would buy an income of just over £3,000 a year. If I invested £100,000 at just 4% it would make £4,000 a year in interest. Even if I just took £5,000 from the original sum, it would last more than 50 years. Are Isas and general savings a better bet for retirement than pensions? J.K., Edinburgh

Tom McPhail, head of pensions research at Hargreaves Lansdown, replies: Annuities very often don't look like good value, but your quote of £3,000 a year from a £100,000 fund looks improbably low. According to the Hargreaves Lansdown annuity calculator, a 60-year-old, non-smoking male could get an inflation-linked income of more than £4,000 a year from £100,000.

Academic studies have shown that annuities do generally give reasonable value for money. One of the problems with them is that investors tend to undervalue the importance of the guarantee that the income will be paid for the rest of their life, irrespective of how long they live.

This certainty does carry a cost, and no other investment vehicle combines the simplicity and certainty of an annuity – you give them your money, and they guarantee not just that your income will be paid for the rest of your life, but also that the income will always retain its purchasing power.

Isas and other investments do have a place in retirement planning, but don't dismiss pensions - their tax breaks make them one of the most efficient ways of saving.

• See our annuities table to compare the latest rates

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