One size doesn't fit all

3rd June 2005 at 01:00
Shopping around for the right annuity is highly recommended as they come in all shapes and forms to suit the purchaser. Trevor Mitchell reports

How many teachers realise how long their retirement is likely to be? Recent research by Nottingham university shows that, typically, men underestimate the time they expect to spend in retirement by 4.5 years and women by six years. The rigours of school life mean that teachers will probably be just as guilty of underestimating the length of their leisure years.

With the actuaries now predicting that a quarter of men aged 65 will live into their 90s, and women living about three years longer than men, it is important to make the right retirement income choices.

Long retirements make an income that will last as long as you do very desirable. If you have made additional voluntary contributions then you can use this pot of money to buy a lifetime income, called a pension annuity.

Getting the choice right revolves around two important retirement needs - security and value for money. Like most retirees, teachers want peace of mind. Many want to get their finances sorted and get on with their well-earned retirement. This is why many prefer to buy their annuities from a household name provider. Having saved long and hard, at the point of retirement teachers need an efficient way to convert their AVC savings into retirement income.

The UK annuity market is very competitive so security shouldn't mean a loss of value. But annuities come in many shapes and sizes. Deciding which is best depends on what you are comfortable with and your attitude to risk.

Most people are cautious when it comes to retirement income. If this is the case, a conventional annuity, which guarantees the exact amount you will receive each month for the rest of your life, may be preferred. These annuities can give fixed increases or can be inflation-proofed, but the popular choice is called a "level" annuity because these give the highest starting income.

Having decided on the type of annuity, the next choice is single or joint life benefits. A single life annuity dies with you and a joint life annuity continues to be paid to your spouse after your death. The spouse's pension can be arranged so that it will pay a percentage of your annuity. To protect against dying early in retirement, a guarantee that payments will continue after death during the first 10 years from annuity purchase can be built in.

All worthwhile guarantees cost something and this is reflected in the income your fund will pay out. But with long retirements in prospect, the purchasing power of level income is likely to be eroded by inflation.

Secure in the knowledge that their main pension scheme is underwritten by the Government, some teachers may not require a totally risk-free environment for their AVCs.

Teachers who want protection against inflation but aren't prepared to take the lower starting income of an annuity linked to the retail price index can shop around for an investment-linked annuity that gives the potential for income growth. These, often called "with profits" annuities, offer access to real assets investments, such as equities and property, though income from them can go down as well as up.

Sadly, not all of us reach our senior years in good health and are not able to look forward to a long retirement. It is possible for such teachers to increase the income they receive from their annuity. "Impaired life" or "enhanced" annuities are available to people with medical conditions that could affect their life expectancy.

After the "learning years" and the "teaching years" comes the "third age", which has the potential to be as long as the first age and as rewarding as the second. Teachers who have built up a teachers' AVC fund should now be able to boost their pension income to help make their retirement the third age they have hoped for.

Trevor Mitchell is head of retirement income at the Prudential

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