Take the case of Mr. D. He has £50,000 to invest and is interested in buying a pension annuity. He has no dependants and suffers from diabetes. He is 61. What should he do?
If he buys a pension annuity with his own capital it is known as a purchased life annuity (PLA). These provide a guaranteed income for life so they are attractive to those seeking low-risk returns. Given that you buy them with your own, already taxed, money, part of the income is tax-free. As a rough guide, take your age as the percentage of the total income that is tax-free. Usually, with an annuity you buy an income for life and this stops once you die.
As Mr. D has no dependants, locking into a pension annuity and giving up capital is probably not a major consideration. But if it is, he can build in some return on death, though this would mean that he receives a lower income.
Such annuities are not generally underwritten to assess life expectancy, but some providers will take diabetes into account and may offer a better income as a result.
