Annuity Options


“I advise you to go on living solely to enrage those who are paying your annuities. It is the only pleasure I have left” — Voltaire

What is an Annuity?

If you have a private pension when you retire you can purchase an annuity, in return for your pension pot you will receive a guaranteed regular income for the rest of your life. You do not need to stop working to start taking you pension, but an annuity must be purchased before you reach the age of 75. You do not have to take the annuity offered by your existing pension provider you can take an open market option. Annuity rates will vary between companies so you need to check which one offers the best rates.

What different types of Annuity are there?

There are several different types of annuity options on the market and which one you choose will be down to your personal circumstances.

STANDARD ANNUITIES – Most people at retirement choose a standard annuity (sometimes known as a conventional annuity). The level of income you get for your pension pot is dependent on your gender (women tend to receive less because as their average life expectancy is longer); age (the older you are, the more you get); and prevailing economic conditions. You can choose to buy a level annuity, which pays the same income for life, an escalating annuity, which increases by a chosen percentage each year, or an indexed annuity, which is linked to an index.

ENHANCED ANNUITIES – An enhanced annuity tends to be beneficial for people with unhealthy lifestyles, such as smokers, or with health problems, or more serious medical conditions such as cancer. The rates you receive from an enhanced annuity can be as much as 20 per cent greater than you would receive with a standard annuity because life expectancy is expected to be substantially less than average and therefore the total paid out by the annuity provider will be less.

INVESTMENT-LINKED ANNUITIES – An investment linked annuity allows you to continue to benefit from equity-linked investments whilst in retirement. This means that your income fluctuates up and down in line with market and investment conditions.

FIXED TERM ANNUITIES – A fixed term annuity operates like a standard annuity, paying a guaranteed annual income (which could be level or indexed and include a spouses pension) in return for a lump sum. However with a fixed term annuity the income is only paid for an agreed fixed term and not for the rest of your life as with a standard annuity. At the end of the fixed term your income will stop and you will receive a proportion of your lump sum back (the amount you will get back is guaranteed and agreed at outset) which can then be used to purchase another form of retirement income.

How much tax-free cash can I take?

You can take a tax-free cash lump sum of up to 25% of the value of your pension fund. This is known as a ‘Pension Commencement Lump Sum’ (PCLS).

How much income will I get?

The ‘annuity rate’ reflects the amount of income you will receive as a proportion of your lump sum. A rate of 8% would mean you would receive £800 a year income for every £10,000 of your pension pot. Insurance companies will look at current market conditions including interest rates and make assumptions about how long people will live to work out what annuity rates they are prepared to offer.

The annuity rate also will be influenced by your health and lifestyle and the choices you make about the type of annuity you require. Choosing to increase or index your income or including a spouses or dependents pension will reduce the initial annuity rate you receive. Annuity rates will also vary between companies and change regularly in line with the prevailing economic conditions, you are unable to change your mind after you have bought your annuity, so it is vital to get advice.

What is an Open Market Option?

When you reach retirement age insurers are required, if you are buying an annuity, to let you know they can exercise an “open market option“. This means you are able to shop around to get the best annuity rate and that you do not need to take your annuity with your current pension provider. As rates between providers differ it makes sense to get advice and shop around.

What are some of the decisions I have to make?

When is the best time to buy an annuity?
Who should I buy an annuity from to get the best rate?
What sort of annuity should I buy?
Are there any other types of pension I should be considering?
How does my health or lifestyle affect my annuity?
Getting advice can really help you choose the right options at retirement.

Why should I get advice and shop around for my annuity?

More than 50% of consumers still buy an annuity option offered to them by their current pension provider. In many cases, this may not be the best option to ensure that they maximise their income in retirement. So shopping around for the best annuity rate is very sensible however price or rate is not the only consideration, the type of annuity you buy is also very important as once you have bought an annuity you cannot change your mind. You need to be very clear about your requirements and the options you can take, and by seeking impartial and unbiased Independent Financial Advice you can be sure that you are getting the best possible advice and making the right retirement decision.

What if I have health problems?

If you smoke, have health problems or a medical conditions you may be able to get a boosted income via an enhanced annuity. It is suggested that more than 40% of retirees would qualify for higher annuity rates on grounds of poor health. But most pensioners miss out on these extra payments, which are payable for life, because they take the annuity offered by their current pension provider rather than getting advice and shopping around. Do you qualify for an enhanced annuity?

Are their any alternatives to an Annuity?

Phased retirement – These policies enable you to split your retirement pot and buy annuities at different times
Income Drawdown – These policies keep your money invested after you retire, enabling your money to continue to grow (or fall) in line with investment returns. Compare Annuities and Income Drawdown
Hybrid products – Polices such as “Variable Annuities” leave your money invested like income drawdown but offer some guarantee of the value of your fund at the age of 75.

Useful Links

The Pensions Regulator – the UK regulator of work-based pension schemes. They work with trustees, employers, pension specialists and business advisers to protect members’ benefits and encourage high standards in running pension schemes.

Financial Services Authority – are the independent body that regulates the financial services industry in the UK.

The Money Advice centre –  a free, independent service, set up by government and are funded by a levy on the financial services industry. The Money Advice Service helps people manage their money better.

Department of Work and Pensions – The Department for Work and Pensions is responsible for welfare and pension policy and is a key player in tackling child poverty.

The Pensions Service – The Pension Service is part of the Department for Work and Pensions (DWP). It provides its customers with pensions, benefits and retirement information – for example, State Pension and Pension Credit.

Government Actuary’s Department – provides actuarial analysis to the public sector from the public sector. For example they set the rates which guide the income payments from Income Drawdown Policies.

The Pensions Advisory Service – The Pensions Advisory Service (TPAS) is an independent non-profit organisation that provides free information, advice and guidance on the whole spectrum of pensions, including state, company, personal and stakeholder schemes

The Financial Assistance Scheme is managed by the Pension Protection Fund and offers help to some people who have lost out on a company pension.

Age UK – a national charity which promotes the interests of all people over 50.

Annuity Providers

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