Annuities Explained

Thank you for visiting the Annuity People website. You’ve been speaking to your financial advisor about converting your pension fund into an annuity, and he or she wants to help you maximise your retirement income by making sure you choose the right one.

Many people don’t realise that they have the right to shop around for a different annuity provider, to provide them a pension income for their retirement. By doing so, you could earn a better annuity rate for your pension fund. This is known as an open market option and it can make a significant difference to your retirement income.

Before you decide which annuity to choose, it pays to know what they are, how they work, and why it makes good sense to shop around. That’s where this quick guide comes in, providing the information you need to consider before securing your annuity.

Definition of an annuity

An annuity is a contract which guarantees to pay you an income for the rest of your life. Buying an annuity involves using the funds you’ve built up in your pension plan. The bigger the pot of money in your pension, the bigger your annuity income can be.

Buying an annuity

You can buy an annuity if you are aged between 55. However, you don’t have to buy one as soon as you retire – you can choose when the time is right for you.

You also have the option to take up to 25% of your pension fund as a tax free lump sum, before you purchase your annuity.

Alternatives

There are a few alternatives which you could consider if you don’t want to buy an annuity straight away. Your financial adviser can give you more details. This may be of interest if you want to keep some of your pension funds invested, or if you are nearing age 75 and would like to look at the options introduced by recent legislation.

In addition, if you have a pension fund of more than £100,000 we do suggest that you speak to your financial advisor.

Types of annuity

When it comes to buying an annuity, you can usually choose from the following options. Generally, the more options in your annuity, the lower your starting income will be.

Single or joint life

If you want your spouse or partner to receive an annuity income when you die, you should consider a joint life annuity. On your death, they will receive an income for the rest of their lives.

Level or escalating

A level annuity provides you with the same income every year for the rest of your life. To protect your income from inflation, you could consider an escalating annuity, which increases at a fixed rate each year. This rate of increase is usually 3% or 5%, or linked to the Retail Price Index (RPI).

With or without guarantee

You can guarantee your annuity for up to ten years. This means that if you die within the guarantee period, the annuity will continue to be paid until the end of the period.

Enhanced/Impaired life annuities

If you have health issues, there is history of ill health in your family or you are a smoker, you could be eligible for an enhanced (impaired life) annuity. This often pays you a higher income as the annuity provider will anticipate your life expectancy to be lower.

Have some questions?

Annuities can be quite complex so you’re bound to have some initial questions. Please refer to our FAQs page by clicking here.