Skip to the content

Individual Clients Workplace Pensions Professional Advisers

Golden Rules

As a regulated financial adviser I must give independent and unbiased advice to my clients. In addition to the many rules and regulations which advisers must follow, I have developed my own three Golden Rules:

Golden Rules

  • Work out when is the right time to purchase an annuity
  • Don't forget to take your spouse or partner into consideration and what about inflation?
  • Make sure you have considered all the relevant options

Work out when is the right time to purchase an annuity

This seems like a simple question, but take it from me, this can be a very difficult question.

  • If you buy an annuity too early or at the wrong time you could be locking into a low income for the rest of your life.
  • If you leave it too late you may lose out on valuable income before you buy your annuity.

    The key to understanding timing is look at two things: Interest rates and mortality cross-subsidy.

Interest rates

Annuities are priced in relation to long-term interest rates (not to be confused with the bank rate). These long-term rates reflect the yield on corporate bonds and gilts. Personally, I use the yield on 15 year gilts which is published in the Financial Times. When I first started looking at annuities in 1990, the yield was over 10% but today the yield is about 1%.

There is a useful rule of thumb – for every 100 basis point fall in yields (e.g. 2% to 1%), annuity income will fall by about 10%.

For example in 2016 before the EU referendum, the benchmark yield was about 2% and the benchmark annuity was £ 4,564 per annum. In December 2019, the yield is 1% and the benchmark annuity is £ 4,110.

The 100 basis point fall in yields (2%-1%) resulted in a 10% fall in annuity income.

Just like the stock market, it is impossible to second guess movements in the financial markets but it obviously it is much better to buy something when the price is in your favour.

Mortality cross-subsidy

Annuities are priced on the principle of mortality cross-subsidy. Those who die before they are expected to give the insurance a company a profit which is used to balance the losses from those who live longer than expected.

Why mortality cross-subsidy is relevant?

At relatively young ages (e.g. 55 to 65), the benefit from mortality cross-subsidy is very small and in later life (e.g. over the age 85) the amount of the mortality cross-subsidy is high.

This means if you purchase an annuity when you are too young, you will not get much benefit form mortality cross-subsidy

This probably seems very complicated and irrelevant to you if you simple want the highest annuity income, but it is worth your while to understand this because you could lose out on a lot of income if you get the timing wrong.

Don't forget to take your spouse or partner into consideration and what about inflation?

Many people think they are better off with a singe life annuity becuase it pays the highest amount of income and think it will be expensive to include their spouse or partner.

However, a good adviser will point out there is only a relatively small reduction in annuity income to move from a single life annuity to a joint life annuity. Generally speaking, once people appreciate the difference in income they go for a joint life annuity.

When people talk about annuities being a no risk option, it should be pointed out that a level payment annuity is at risk from inflation becuase inflation redcues the spending power of a fixed income.

The difference between a level annuity and an inflation proofed annuity is between 30 and 40% depending on the exact options.

Therefore, most people now purchase level annuities - I think this is understandable but make the comment that it is prudent to take account of inflation.

There are may ways to plan for the effects of inflation and a financial adviser will explain these options

Inflation is like sin; every government denounces it and every government practices it.

Frederick Leith-Ross

Make sure you have considered all the relevant options

There is no one who likes annuities more than I do, but they are not without their shortcomings There are two main problems with annuities; there is no lump sum death benefits and annuities rates are at the lowest levels ever. This was eloquently articulated by Lord Grantley speaking in a House of Lords debate on pensions in October 1997 when he said: "In my view, there are two overwhelming reasons why people should not invest in annuities under any circumstances.

  • The first is that investing in annuities is contrary to the interests of a family . . . in that they are worth nothing when the investor dies.
  • The second reason is simply that annuities are a lousy form of investment."

For this reason it is important to compare and contrast all the different options.

Annuity alternatives  
 Learn about Drawdown
Learn about Fixed Term Income Plans


William Burrows

Offices in London, Northampton and Cardiff

Call: 07730 435 657


William Burrows / Retirement Intelligence Ltd
International House
24 Holborn Viaduct
Better Retirement
400 Pavilion Drive
NN4 7PA 

If you need help or advice - Contact us

As one of the most respected specialist retirement advisers, William Burrows and Better Retirement will be pleased to help you make the right decisions at any stage of your retirement journey.

Call or email now for a free and without commitment chat.

This website is run by William Burrows and publishes generic information on annuities, drawdown and other related retirement income matters. Any information you use is at your own risk and does not constitute financial advice.

If you require financial advice you will be advised by Better Retirement where William Burrows is authorised to give investment advice. Better Retirement Group Ltd is authorised and regulated by the Financial Conduct Authority, reference number 153420.