As we work primarily in the re-retirement and retirement market, I have many discussions with clients about annuities. Many people dislike the concept because they maintain that they have spent their working life building up a fund and if they die early, the Insurance Company soaks up the remaining fund which is lost to the family. This is a reasonable argument.
However, I think that a true understanding of the annuity has been lost along the way. An annuity is like a life assurance in reverse. What do I mean? If you take out life assurance you pool the risk of dieing with many others of the same age, for this you are prepared to pay a premium to cover the eventuality of your death and the corresponding pay out. In this case it is those who die early who benefit. The annuity is similar, again it is a pool of people of the same age, they have taken out insurance against longevity. In this case it is those who survive the longest who receive the spoils. So, to say that the Insurance Company benefits is incorrect, it is those remaining in the pool who benefit because there will be sufficient funds to continue to pay out their annuity income.
If you come from a long living family, there is a definite advantage in including some element of annuity within your investment portfolio, you should look upon it as insurance against living too long.
There is also an argument for purchased life annuities (these are not pension annuities) on a basis where the income continues to the surviving spouse. I was recently involved in a case where the husband had unfortunately to go into Residential care. His wife was concerned that much of his capital would go to support the nursing home costs and her income would drop on his death. Rather than buying an annuity based on his health (which may have provided a higher income) we purchased a joint life annuity. This had the effect of taking the capital out of his estate but meant that the wife’s income would be maintained even after her husband’s death. The taxation of such annuities is also advantageous because only part of each payment is taxed; the Revenue consider the balance of the income to be repayment of capital.
So like them or hate them, the annuity can have a useful part to play within financial planning.