Annuities Example 27

Mr and Mrs Diamond, both aged 75, have only a fixed pension in addition of the State old-age pension. But they do own their own house, now worth £1115,000. They raise a loan of £500,000 on the house and invest the money in a joint life and survivor annuity.

This produces an income of £1900 a year (after income tax on the interest portion of £170). The loan interest (at 7% on £500,000) amounts to £1700, which is deducted from the annuity payment, leaving £1200. This sum is paid out in quarterly instalments.

But Mr and Mrs Diamond can also offset the interest on the loan against their income tax liability; this reduces their tax bill by £1231, so that the overall increase in their net spendable income as a result of the scheme is £1431. When they are both dead, the annuity will cease and the loan will be repaid out of the sale proceeds of the house. Incidentally, the debt will reduce the value of the estate for the purposes of capital transfer tax.

Two points are worth emphasising since they are not always appreciated by those thinking about such schemes. First, the house is the security for the loan and on the death of the annuitant(s) has to be sold to repay the loan, unless the executors have other assets available to meet the debt. Depending on the proportion of the value of the house taken as a loan, there will still be something left over for the dependants of the borrowers, but obviously not as much as if they had not used this scheme.

The annuitants themselves have complete security of tenure, but the sale of the house and the loss to the dependants of the amount of the loan must be taken into consideration. Secondly, the scheme becomes viable (in terms of producing a worthwhile addition to spending money) only when both marriage partners are fairly old, aged over 70 at least.

For single people the scheme may be viable at younger ages, but again it has to be remembered that women live longer and get less favourable annuity rates, so that women aged under 70 will not find this type of scheme of much use in increasing their income. Terms and conditions offered by the offices involved in this scheme vary and it is well worth "shopping around".


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Annuities Example 25

Mr and Mrs Bird (both aged 70) wish to take out a joint life and survivor annuity. For an investment of £500,000 they will receive £111,400 a year until the survivor dies. The return under this type of annuity can be improved by stipulating that after the first death the income is reduced by some proportion, usually one-third. If Mr and Mrs Bird were to agree to this, then their £500,000 would purchase the payment of £111,570 a year until the first death and £111,047 thereafter until the second death.

Such annuities are, of course, even more vulnerable to... see: Annuities Example 25


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