WILL YOU LIVE LONG ENOUGH TO MAKE UP LOST TIME?

What concerns us here, is the choice between a flat or level annuity, and other alternatives that provide the opportunity for increases in your income. A fixed 3% increase is nice and clear; alternatively a with profit annuity will provide the opportunity for increases, possibly more than 3%, but with no guarantee.

If you want guaranteed increases, or the opportunity for those increases, typically your starting income will be lower than if you opted for a level (non-increasing) annuity. As such, you need to have a feel for how long it might take you to make up the lost ground. Put another way, will you live long enough to enjoy the increases?

In the table below, we show the different levels of starting income for different annuities. In the second column is how long it will take to catch up with the income you would have received from a level annuity.

TABLE: Male age 65, purchase price £100,000, single life, no guarantee, no widows benefit

Type of annuity	Starting income	Income catch-up
Level annuity	£7,510	-
Escalating 3% p.a	£5,510	10 years (age 75)
With profit annuity, 0% ABR	£4,926	14 Years (age 79)
With profit annuity 5% ABR	£8,330	n/a

(Source: Exchange and Prudential, Autumn 2007)
The two with profit annuity figures assume future growth of 5% per annum

Taking the 3% escalating annuity, it will be 10 years before the increasing income matches the level annuity (which started at a higher level). But this takes no account of the income you didn't receive in those 10 years compared to the level annuity. For the total income received to be the same from the bother types of annuity it will take nearer 20 years.

Thank you for your latest information. Very helpful and puts the present situation into perspective...
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