How do I use an Annuity Calculator?

If you are coming up to retirement age and have been saving into a private pension you maybe wondering what income you will get from an annuity?  One method many people look for when buying an annuity is using an annuity calculator which can be found on a number of websites.  An annuity calcular is essentially a quick tool which allows individuals to get an approximate idea of the kind of level of income they can expect to receive when they buy an annuity. They cannot however offer a full annuity quotation as this can only be done by consulting with an annuity specialist or professional financial adviser. An annuity calculator only requires some very basic details to be given in order to produce a ‘quote’ including a person’s age, fund size, location, whether they are a smoker or non smoker, and whether they want to include escalations.

Not all of those people using these calculators maybe aware that they can’t produce a comprehensive annuity quote, such is the level of understanding around the topic of annuities. One issue is that many other forms of insurance and financial products can produce accurate quotes using online tools and calculators. However an annuity quote needs to be done on a case by case basis as detailed information is needed about an individual’s health, as well as knowing what type of annuity product they require. There are many different types of annuity products available which is why they cannot all be incorporated into an annuity calculator.

Below we have listed the basic questions you will be asked when using an annuity calculator and how they impact on your income level.

-Your age

Older retirees are by enlarge offered superior rates to younger retirees who are likely to live longer.

-Where you live

Geography impacts on rates as those living in wealthier areas of the country are likely to live longer and so are offered lower rates compared with those living in poorer areas.

-Your fund size

Obvious really, those with a bigger fund with be offered a higher income.

-State of health / Smoker

There is often a general tick box for those who are in ‘poor health’ and/or who smoke. Smokers are offered better rates as they on average die sooner than non-smokers.

-Escalations

Some retirees like to build in escalations to their annuity as inflation reduces real terms spending power.

As you can see these are brief questions which are used to show illustrative rates. Knowing your state of health is crucial to the person producing your annuity quote as it will determine whether or not you are eligible for an enhanced annuity that will pay a higher rate compared with a standard annuity. Rather than knowing whether you are ‘healthy’ or ‘unhealthy’ as is the case with an annuity calculator, it is better to declare any past or present medical conditions which will involve speaking to an annuity specialist. Using an annuity calculator can be a useful way of getting a rough idea of the level of income you might get but they are no replacement for speaking to a trained specialist.