What exactly is an annuity?

A conventional annuity is the simplest method of converting a pension contract into an income.

It is a very simple product, and the basics are relatively easy to understand:- in simple terms, you hand over the proceeds of your pension fund to an insurance company, and they provide you with an income for life (annuity).

The income you receive is guaranteed, and will be at least payable until the day you die. Under current rules, you can buy an annuity from age 55.

How much income your annuity provides is based on your age, and the annuity options you select. 

Different insurance companies have different views on life expectancy, and the types of business they want to attract. The annuity rates they offer can vary widely from one company to another. So, it always pays to shop around for the best annuity deal for your circumstances, and this is called the “Open Market Option”. Your pension company will probably offer you an annuity, but in most instances, this can be bettered by shopping around.

So how much can I get from an annuity?

Well that depends…

With an annuity you can build in different features. This is where things can start to get a little confusing.

There are two different options you can have with lifetime annuities:

  • Level – this will pay a fixed income that won’t ever change
  • Increasing – one that goes up each year, usually by a fixed % or a measure of inflation
Level annuities will pay a higher amount each year, but that level will also depend on personal factors and options you want to build in for your loved ones. 

What if I were to die?

You can also build in different options to protect your loved ones in retirement. More often than not, these provide an income to a spouse in the event of your death, either through what is called a “joint life” annuity or a “guarantee period”. 

Click here to find out more about these annuity options. 

Are there other options?

Absolutely! If you don’t think a conventional lifetime annuity is for you, there are of course other options. 

The main ones are:

  • Enhanced Lifetime annuity – also known as impaired life annuities,  these types of annuity are for those who are in ill health. Enhanced/impaired life annuities don’t just apply to serious conditions such as cancer or heart problems. Even relatively minor conditions (especially if there is more than one) can qualify you for an enhanced annuity.
  •  Fixed term annuity – this is effectively what it sounds like, an annuity that pays out for a fixed period and works in a similar way to a lifetime annuity in that, you hand over your money to an insurance company, they pay an income, and then at the end of the term, depending on the level of income you have chosen, you can get your initial sum back. It could also be lower or higher, depending on the amount of income you want. Please note that technically, this is actually a drawdown contract but looks like an annuity. 
  • Flexi-access drawdown – this allows you to access your pension fund in a flexible way using it like a bank account and taking occasional or regular withdrawals. 
For more information click the links above or contact us today to discuss with an adviser.