Paul Kenny of Irish Pensions Trust read with great interest the recent Family Money article about pension annuities, specifically the perceived disadvantages of buying an escalating annuity - that is, one that is worth less immediately at retirement, but which increases in value in line with inflation.
The argument against an escalating pension - it can take more than 10 years before its value matches one originally taken out at full value, "only stands up in the context of a single life pension," says Mr Kenny "assuming the person survives the average period of expected life after purchase. If he survives beyond the usual 15 years, the argument gets weaker, and weakens further if a rate of interest, net of tax of much less than 4.5 per cent is assumed.
"The fact is that most annuities actually bought are not based on one life only, but include reversionary pensions for dependants on death after retirement. On this basis, the picture is much different."
According to Mr Kenny, a person with a pension fund of £137,353 would result in an annual income of £9,125 a year for a joint-life pension with 50 per cent of it reverting to the spouse if the husband dies. Her pension income would now be £4,563 per annum. "If we apply the same purchase money to a joint-life pension with 3 per cent cost of living built in, the annual pension is £8,330, reducing to 50 per cent of whatever its increased value is on the death of the male. "The picture we get then becomes as follows: a single life pension of £10,000 per annum is a total payout worth £150,000; a joint pension with no indexing and annual pensions of £9,125 for 15 years and £4,563 for say, eight years is worth a total of £173,415. But an indexed joint life pension - the last example - paid out over the same 15- and eight-year periods ends up being worth £219,204.
"What this demonstrates is that single-life annuities are bad value compared to joint life ones; that single-life annuities are incredibly bad value compared to escalating joint life ones."
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