Annuity on death

JMC_4

Hi,
Although I'm still many years from retirement, I'm trying to find an answer to what seems like an obvious question...
In the event of death what would happen to the money I put into the annuity? For example, if I invested 250000, assuming the annuity wasn't continued with a partner would the annuity be cancelled and the 250000 returned to form part of my estate or would the money be kept by the annuity provider?

Sorry, this feels like a stupid question but I can't seem to find a straightforward answer to this.

Gary1984

Generally it's kept by the provider as you're cross subsidising those that live to a very old age. However you can buy an annuity that guarantees to pay up for the first 5 years say, in the event of early death. However if you select this option the regular annuity paid to you would be slightly lower than it would be without the guarantee. 

eskbanker

When you buy an annuity with £250K, you've spent that money and in return have a guaranteed income for the rest of your life, so that's an irreversible process and you (or your estate) no longer have any claim on the capital sum spent to buy that income.  If you want to leave any residual money to your survivors then don't buy an annuity but use drawdown instead....

JMC_4

Ok, thanks. Maybe I'm misunderstanding something but if that's the case annuities seem a strange choice seeing as they appear to return around 4% of your investment a year. Surely you would be better keeping the money yourself and extracting 4% from the pension yearly and thus keeping the lump sum plus any increase in value above 4%?

NottinghamKnight

JMC_4 said:

Ok, thanks. Maybe I'm misunderstanding something but if that's the case annuities seem a strange choice seeing as they appear to return around 4% of your investment a year. Surely you would be better keeping the money yourself and extracting 4% from the pension yearly and thus keeping the lump sum plus any increase in value above 4%?

Yes, if you can guarantee making over 4%. We have been in an environment for many years where low risk assets return little, government bonds issued by the safest economies are actually negative now in many cases, ie you pay them for the honour of lending them your money. You can argue that an annuity is just a more expensive insurance product than it was historically, against living too long.

dunstonh

In the event of death what would happen to the money I put into the annuity? 

It would depend on the death benefit options you selected at the outset.    You can have anything from no death benefit, spouse benefit or lump sum return of capital not paid under the annuity and guaranteed income payments for up to 30 years. Other variations exist.   The pension freedom options didn't just expand the drawdown options. It changed the rules on annuities too.

Thrugelmir

NottinghamKnight said:

JMC_4 said:

Ok, thanks. Maybe I'm misunderstanding something but if that's the case annuities seem a strange choice seeing as they appear to return around 4% of your investment a year. Surely you would be better keeping the money yourself and extracting 4% from the pension yearly and thus keeping the lump sum plus any increase in value above 4%?

You can argue that an annuity is just a more expensive insurance product than it was historically, against living too long.

With modern medical advances people stand a far better chance of living longer. 

jamesd

JMC_4 said:

Surely you would be better keeping the money yourself and extracting 4% from the pension yearly and thus keeping the lump sum plus any increase in value above 4%?

Drawdown: safe withdrawal rates introduces the studies into how much you can withdraw.

You have the potential to beat annuities in part because you can be flexible with the income. Annuities must pay and that coupled with regulation pushes annuity firms into low return investments. Something similar applies to defined benefit transfers.

Later in life, somewhere above age 80 or with reduced life expectancy, annuities can start to pay more than drawdown and it can become a good move to do some buying. Earlier, the increase in effectively guaranteed income from state pension deferral can be an excellent move.

NottinghamKnight

Thrugelmir said:

NottinghamKnight said:

JMC_4 said:

Ok, thanks. Maybe I'm misunderstanding something but if that's the case annuities seem a strange choice seeing as they appear to return around 4% of your investment a year. Surely you would be better keeping the money yourself and extracting 4% from the pension yearly and thus keeping the lump sum plus any increase in value above 4%?

You can argue that an annuity is just a more expensive insurance product than it was historically, against living too long.

With modern medical advances people stand a far better chance of living longer. 

But not necessarily with a high quality of life, in which case living costs become higher. 

AnotherJoe

JMC_4 said:

Ok, thanks. Maybe I'm misunderstanding something but if that's the case annuities seem a strange choice seeing as they appear to return around 4% of your investment a year. Surely you would be better keeping the money yourself and extracting 4% from the pension yearly and thus keeping the lump sum plus any increase in value above 4%?

You'd be very lucky to get 4% on an annuity. Or perhaps I should say unlucky, eg in bad health, limited life expectancy etc. 

Malthusian

NottinghamKnight said:

JMC_4 said:

Ok, thanks. Maybe I'm misunderstanding something but if that's the case annuities seem a strange choice seeing as they appear to return around 4% of your investment a year. Surely you would be better keeping the money yourself and extracting 4% from the pension yearly and thus keeping the lump sum plus any increase in value above 4%?

Yes, if you can guarantee making over 4%.

It's not necessary to make 4% a year to beat a 4% annuity where you lose all the capital on death. If you draw 4% of the initial sum each year from age 60 and get only 2% growth, and die at age 90, you still have more left over than if you'd bought an annuity, i.e. nothing.

Of course, if you live to 95 you've run out of money, which is the point of annuities.

AnotherJoe said:

You'd be very lucky to get 4% on an annuity. Or perhaps I should say unlucky, eg in bad health, limited life expectancy etc. 

Standard level annuity rates are 4% for someone aged 60, or two people around 62.

Inflation-linked annuities are lower but you have to be incredibly risk-averse to buy an inflation-linked annuity, given how long it takes to make up the income foregone in the absence of 70s-style inflation.