Annuities grow popular for extra cash

Published on Friday 24 July 2009 13:58

RETIREES on the hunt for more income than currently supplied by high street savings products are increasingly turning to annuities to bridge the gap.

With savings rates still low and confidence in equities yet to recover from the battering of the past year, the search for income has prompted more older investors to buy a pension and convert it into an annuity straight away. In doing so, they can get an income anywhere between 5.4 and 11.4 per cent, depending on their age, even though annuity rates are on the slide.

Nigel Callaghan, pensions analyst at Hargreaves Lansdown, explained that most retired investors between 50 and 75 are able to pay 3,600 a year into a pension, including tax relief of 720.

The 2,800 cost of buying the pension is reduced further by a 900 tax-free lump sum, clipping the cost to 1,980.

Investors who then use the pension to buy an annuity can get their first year's income immediately, although the income level depends on age, with older investors cashing in most, said Callaghan. "Investing 3,600 into a pension and immediately buying an annuity will produce a far better return than most savings accounts, giving a beleaguered saver's income a much needed boost."