Annuities: you only have one chance, so get it right

Is it just me or are annuities a huge scam? The rate of return is poor and then the insurance company keeps the capital when the annuitant dies!

They sure are. What a massive rip off. Bloody disgraceful.

Keith and Peter, you have the remedy in your own hands. Just don't buy an annuity.

If I had a fund of £100,000 in a SIPP and I couldn't get a better rate of annual return than 6% I'd feel I was doing very badly. My own (much smaller) SIPP portfolio is currently showing an 8.9% annual return, despite being fully invested throughout the recent recession. If I take out 6.02% to match the Aviva annuity rate, I still get an 8.9% return on the remaining 93.98%, which will give me 102.34% the next year, and this compounding will go on year after year. That's how the annuity providers make their money.

Looks like a no-brainer to me. And my kids can inherit 45% of what's left!

Keith, Peter, Roger

Have you ever heard of Henry Allingham? Henry died last year aged 113, having received payments from an annuity for 48 years. Far from the insurance company keeping the capital when an annuitant dies they redistribute the income to the likes of Henry Allingham.

If you can guarantee not to live longer than average then you won't need to insure against doing so - you could always go to Switzerland when the money runs out and you can no longer afford to look after yourself!

David - Or indeed Jeanne Calment, who lived in France to 122, having at the age of 90 persuaded her solicitor to pay her an annuity in return for her flat when she died? The solicitor died long before she did . . . . . !!! (Oh, and his estate had to keep paying the annuity, until they had paid three times the value of the flat).

If you accept that my net gain each year (see above) is 2.34% and compound that for Henry Allingham's 48 years, my £100,000 SIPP turns into £296,574. It seems it is possible to self-insure against living longer than average.

The other scam is index-linked annuities. In return for keeping pace with inflation you get a much-reduced annuity to start with. So when do the two graphs cross over? When you're 93. Sorry, I'd rather have a higher pension between 65 and 93. When I'm 93 I won't care if my pension keeps pace with inflation.

Hi all,

I don't think annuities are a 'rip off' per se it's just horses for courses. A 8.9% return (after charges that could add another what? 1 - 1.5%) is a very good return which could probrably only be achieved by a higher risk portfolio.

So if you have a reasonable sized pension pot so charges are not prohibitive i.e over £50k (I read that 80% are below £30k), are prepared to manage it yourself, accept the investment risk, can live on reduced income if markets crash then drawdown is a good flexible solution.

But for the average Joe Punter a fixed annuity (with a 10yr guarantee) is the 'safest' option - even though I agree not great value.

David Vardy -

The 8.9% annual rise is net of all charges. My SIPP provider charges me £40 a year.

The SIPP is invested in carefully-chosen investments trusts, each of which holds at least 50 different companies' shares, so I regard that as well-diversified.

I don't regard the SIPP as risky - some might - but I do monitor the SIPP regularly and I am quite happy to sell an investment trust and buy another which is performing better.

The price you pay for an annuity is the price for having someone else do the monitoring. Is that safe? How do you know? I'd rather trust to my own judgment.