What is the best age to use my £220k pension to buy an annuity?

I am 70 years old, in fair health and currently have a pension pot of £222,000.

This pension is with Aviva and I’m pulling it up £1,000 per month.

I believe my pension fund has done quite well and is down about £33,000 since I started taking out six years ago.

My wife also has a small private pension worth £42,000 of which she takes £350 a month.

We both receive state pension. My question is when or should I switch to an annuity.

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Steve Webb replies: I’m glad to see that you and your wife have been able to enjoy the flexibility that comes from the “pension liberties” reforms by dipping into your retirement pot as needed and leaving the balance to invest.

I was particularly impressed to see that although you have regularly withdrawn amounts and despite some rocky market moves over the past year, the balance in your pot is holding up quite well.

But you rightly look forward to a time in your life when you could appreciate more security, and consider trading some of your savings for a guaranteed income from an insurance company.

The great benefit of using some of your savings to buy an annuity (a guaranteed income) is that it can remove one of the great uncertainties you face, namely how long each of you will live.

Once you take out an annuity, it will continue to pay out even if you happen to live into your 90s or older, so you don’t have to worry about running out of money.

The exact amount of regular income you get will depend on market rates (annuity rates were very low for many years, but have risen significantly in the last 12 months), how old you are, and whether you are in good health.

To give an example, a typical 70-year-old in average health could currently get around £6,300 a year for a standard annuity bought with a £100,000 pension pot.

As you get older, the annuity rate offered will increase, with a typical 75-year-old being offered around £7,000 per £100,000 pot and an 80-year-old around £8,300.

Interestingly, the annuity rate should be the same for a man or a woman, as it is now illegal for the insurer to differentiate between men and women.

Given that a woman will live longer on average, you might want to consider having your wife buy an annuity instead of yourself.

Another advantage of this is if your wife pays income tax at a lower rate than you do, since annuity payments are subject to income tax.

There are also different types of annuities that you can purchase. Some of the main choices you’ll want to consider (each of which lowers the annuity rate to be paid) are:

– Do I want a ‘guarantee’ period, which means that even if I die shortly after purchasing the annuity, there is still a minimum payment?

– Do I want my annuity to increase every year to (somewhat) take inflation into account?

– Do I want the annuity to pay a fixed income to my spouse after my death?

In all cases, you should shop around (via an annuity comparison site or a financial advisor) for the cheapest annuity.

You need to make sure that it takes full account of any health issues you may have when you remove it.

Of course, there are also disadvantages to buying an annuity. Once you hand over a lump sum to an insurance company, it is no longer there to be passed on to your heirs (other than any “guaranteed payment” offered by the insurer).

Likewise, money allocated to an annuity is no longer available to be invested and the return you get on an annuity is likely to be less than you could get by taking any investment risk.

Getting back to your original question, the “right” time to buy an annuity (if at all) will probably be different for everyone.

If you or your wife find yourself worried about market movements and want more security as you get older, the modest but sure returns of an annuity may appeal.

You may also want to consider whether your ability to make complex financial decisions about your savings account will decrease as you get older and whether buying an annuity will relieve you of that burden.

Research conducted by my firm LCP has suggested so for many people, the best time to buy an annuity is in your late 70s or early 80s but I must emphasize that this is based on general models and the right answer for each individual depends on their specific circumstances, such as health, risk appetite and desire to leave a legacy.