How To Use The Money Advice Service Annuity Comparison Tool
Part of planning for retirement is knowing how much, if any, of your income will be secured, that is, guaranteed for life. In this video, I explain how to use the Money Advice Service Annuity Comparison Tool which can give you a good idea as to the level of income rates you can expect your pension fund to produce.
How to use the MAS Annuity Comparison Tool
The main use of this tool, in my opinion, is its ability to produce an annuity rate, that is, the amount of income you are likely to receive per £10,000 of fund.
In the example in the video, an annuity of £308 per year is produced, representing a 3.08% annuity rate. The benefit of the tool is to show the impact of the different choices you can make for your annuity. By going through the process multiple times, with different inputs, and then writing down the outcome, you can see just how much it will cost you to, for example, provide a spouse's pension.
The primary options you can choose are:
- Spouse's Pension, to different degrees (e.g. 100% payable to spouse on your death, or 66%, or 50%)
- Indexation or rising income, and at what level (e.g. in line with inflation, or a fixed amount like 3% or 5% per year)
- Guarantee, or minimum payment period. This provides that if you die early into the annuity, it will pay for a minimum number of years
Each of these options detracts from the level of annuity you will receive. So a rising income will start lower than a level income, and a joint life annuity will be lower than a single life annuity.
Finally, your health will impact your annuity choices too, and so the tool asks some basic health questions. This will show you the impact of, say, high blood pressure or smoking on the annuity rate, but it is not as detailed as an annuity tailored for your specific circumstances.
The power of the tool is to help you see the impact of these choices and inform your decisions.
If nothing else, the annuity comparison tool should give you some idea of the large number of choices available. Such wide choice can lead to decisions inertia – making no decision at all – because you simply don't know where to start. A good adviser can help you here.