Annuity Calculator

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Annuity Calculator

What are annuities?

One of the more attractive aspects of investing in an annuity is the fact that it can provide you with a guaranteed income for the rest of your days. If you choose to receive annuity payments for life, whatever age you reach, the insurance company will pay you a regular income.

The term for converting your pension fund or other lump sum into income (in this context) is annuitisation. The annuity converts your lump sum, whether it comes from a pension fund or other sources into an income (normally monthly) Pension annuities are generally paid for life however a period of time that you decide

How much will it pay?

We can look at an example. A 70 year old man wishes to invest £100,000 from his pension fund to provide him with a regular income for the rest of his life. He organises the payment of his pension fund to his chosen annuity provider his chosen annuity provider, and the insurer will then provide him with an annual payment of £7,819 regardless of how many years he survives (This amounts shown are for illustration purposes only).

The calculation of the payment is based on a simple mathematical formula, based on how much is paid in, how long the payments will have to be made, and the return that the insurance company will get from investing the money themselves. This example worked on the basis that the insurance company will get a 6 percent return on their investment, and that the customer will live for another 17.5 years.

If the customer lives to be 110, he will have exceeded the 17.5 years the insurer expected him to survive, and the insurance company will therefore lose money. If however he dies only 3 years after he started to receive payments, the insurer will keep the rest of the proceeds from the annuity, and so be in profit. To minimise their risk, insurers will spread their investment risk widely among as many annuity purchasers as possible. The law of averages dictates that the insurer should be statistically even on payouts and income in the long run.

This is known as the cross mortality subsidy. Many people are now unhappy about this and a whole range of new products are available that enable people to avoid this. We recommend that before considering the alternatives financial advice is sought from an independent financial advisor

The payments will vary depending on the amount invested, and the expected returns that the insurer will receive from investing the money. If the insurer will receive a 7 percent return on their investment, the annual payments will increase to £9,122.17. Conversely, if the insurer expects a return of 3 percent on their investment, the payments would decrease. This return paid to the customer is based on the anticipated performance of the insurers investment portfolio.

Other Factors

Two major factors in the payout calculation are the age and sex of the customer. If we take our example and say our gentleman is 74 years old instead of 70, the same £100,000 lump sum invested will pay £9,788.00 annually, an increase of 40 percent. The difference is because the insurer anticipates making payments to the customer for only 11 years instead of 17.5. The payments for women are also affected by their longer life-expectancy. If we change our example to a 70 year old female (expected to live for another 20 years), the annual payout will be £6,443.00. An 74 year old female would receive £7,645.00

If you choose your payout to be guaranteed, you will receive guaranteed payments, that for a fixed length of time, eg 10 years, you can pass on to your beneficiary. Should you die before this period of time elapses, your beneficiary will receive the monthly payments until the end of the guaranteed period, at which time the payments will stop. In our example, the 70 year old male's £100,000 investment would yield a return of £7,819.08. The payout is lower because the insurer knows it will have to make payments for at least 10 years. The customer will still receive the monthly payment should they outlive the 10 year period, but this payment will stop on their demise and not be passed on to their beneficiary.

Guaranteed payments for life

Should you wish to guarantee that your payments are passed on to your spouse for life, not just a fixed period, you can choose a Joint Life Annuity. This is a popular choice for married couples. A husband and wife, both 74 and investing the same £100,000, want a lifetime income from their investment that will continue even after one of them has died. The payout will now be £7,553.64 per year, £2,235.24 less than the original calculation without the survivorship benefit. This takes into account the likelihood that the insurer will have to make more payments. A joint life annuity can be for more than two people to benefit, and in this case the calculation becomes more complicated, and the payments reduced.

Obviously the amount paid will vary according to the amount invested into the annuity, the age of the annuitant when they start to receive payment, and the type of annuity (lifetime, guaranteed, or joint life) required.

UK IFA NET provide fully independent Annuity Advice for your individual requirements. Simply click for a quote. Alternatively speak to one of their highly experienced consultants today on 0845 365 2410 quoting ref WS9 or fill out our online quote request form and one of their advisors will contact you.