Bank of Scotland: Take advice when buying an annuity pension

10 July 2007
You should think long and hard about which type of pension is going to suit you before buying, is the advice from the Bank of Scotland Annuity Service.

Knowing whether you should opt for an annuity that provides a level income, one that rises with inflation or a product that offers capital growth and an increasing income is one of the most difficult decisions you have to face when approaching retirement age, and, says the Bank of Scotland, you need to think about your own personal circumstances when looking to buy.

For example, a man aged 65 with a single life annuity pension fund of £100,000 will receive £7,188 a month for the duration of his pension if he opts for a flat rate annuity.

If he goes for an annuity that rises with inflation, he will receive just £5,349 after five years, but this will increase gradually over the years; after 10 years, it will go up to £7,701, after 15, the monthly payment will be £9,829, after 20 years, he will receive £16,010 a month, and after 30 years, the amount will become £20,434.

"Inflation is the enemy of retired people because it erodes the buying power of their pensions,” says Kevin Pacey, head of Bank of Scotland Annuity Service.

“Once you retire there are no more bonuses, no more overtime and no more promotions. People face a dilemma when it comes to buying an annuity: should you take a flat-rate annuity that pays a higher income initially but which is eroded by inflation, or buy an escalating annuity that pays a lower rate initially but rises each year?

"Inflation-linked annuities generally become better value the longer you live and the higher inflation is. At the age of 65, about 17% of men and a quarter of women can expect to live to 95; which gives inflation plenty of time to erode a pension income.

“However, there is no simple answer as to the best type of annuity; it depends on the customer's individual circumstances such as age, health and risk profile and that is why it so important to take advice to find the best annuity for your retirement."

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