Annuities Explained
Anyone currently paying into a personal, stakeholder or money-purchase pension scheme will probably have to buy an annuity to fund their retirement.
There are significant differences in the performance of the best and worst pension annuity rates and the advice of an independent financial adviser should be sought to ensure you get the best annuity rate.
Before you purchase an annuity it is important to understand the ins and outs of them. We recommend that you read through the information below and contact us should you have any questions.
What is an annuity?
An annuity is a type of insurance policy that provides a regular income in exchange for a lump sum.
When you reach retirement you can convert the capital built up in your personal pension policy(ies) into a regular income. You can take up to 25% of your pension pot as a tax-free lump sum, but the rest must eventually be converted into an annuity.
In one sense, they work as life insurance in reverse. The insurance company that sells you the annuity estimates how long you will live and then uses this as a basis for the amount it will pay you.
Everyone who has a pension and has built up a lump sum with their provider must buy an annuity by the time they reach 75.
The exceptions are those who are part of a workplace final salary scheme, but, as these are becoming less common, most people are currently faced with the annuity option.
Over the past few years, annuity rates have fallen sharply and a 65-year-old man now earns a typical return of just 6% from his pension fund. Therefore, with a pension fund worth £100,000 he would receive an annual income of £6,000.
You do not have to take the annuity offered by your existing pension company. Annuity rates vary between companies so you need to check which one will give you the best deal.
Switching could boost your pension by hundreds of pounds a year or enable you to invest in a different type of annuity that better meets your needs.
What are the different types of annuity?
Most people opt for a conventional lifetime annuity, but there are several options to pick from.
- Level annuity Your income will stay the same each year irrespective of inflation
- Increasing annuity This can either match inflation for the rest of your life or rise by a specific percentage each year
- Guaranteed annuity This will continue to pay out for a time to a nominated individual if you die soon after retiring
- Joint-life annuity A joint life annuity gives your partner some or all of your continuing income if they outlive you
- Investment-linked annuity If you have a larger pension fund, you may prefer to invest it in the stock market. This means that your annual income could go down as well as up
- Impaired/Enhanced annuity If you have medical issues or have a lifestyle that could affect you life expectancy then you could be eligible for a higher income in retirement
Explore your options
Many people assume that they have to buy an annuity from the company that has held their pension. This is not the case, as you have the right to shop around for the best pension annuity rates when you retire – it’s called the Open Market Option (OMO). Worryingly, figures from the Association of British Insurers (ABI) show that 61 per cent of people who bought an annuity in 2007 did not shop around in this way.
There are huge differences between the level pension annuity rates offered by the various annuity providers – underlining the fact that you should use the Open Market Option.
The Open Market explained
Did you know that over 60 per cent of people in todays market still purchase annuities from the provider that they have also saved their pension with. (Source: Reuters) This could potentially mean they are missing out on hundreds of pounds of retirement income a year.
The large majority of these policy holders do not realise that they can choose whichever annuity provider they wish, to receive the highest income for the future. This can obviously make a huge difference to your lifestlye with the amount of income you recieve.
Obviously the most time consuming element to this exercise, for you, is the research into all the various quotations that all the major providers offer. Why not consider using AnnuityForLife to help find you advice and compare the best rates for your annuity. Simply fill out our easy no obligation form and we will put you in contact with a specialist Independent Financial Advisor to obtain a quote.
Buying an annuity is one of the most important financial decisions of your life as it determines the amount of income you will receive during your retirement.
To obtain the best out of your retirement fund it is highly important to get the best amount of income from your annuity.
Unsure as to which annuity may be the most appropriate for you? Could another scheme such as Phased Retirement or Pension Drawdown be more beneficial to you? If you fill out our easy no obligation form then we can put you in contact with the an independent financial expert to advise on the best options for you.
