Annuities – what are they?
When we say ‘living off our pension’, what we usually mean is living off our annuity. Put simply, you take your pension pot and buy an annuity from an insurance company, which will pay you a regular fixed income for life, or an income that increases, usually in line with retail prices.
How much will you get?
Several factors can influence how much you get from an annuity – your age, health, gender and marital status and interest rates at the date of your retirement. The younger you are, the longer you are expected to live, and therefore the lower the income will be. Women are also expected to live longer than men, so will receive a lower income.
When interest rates are low, so typically are annuity rates. A lot will depend on how much risk, if any, you’re prepared to take.
Just because you’ve been saving your pension with one company, doesn’t mean you are tied to buy your annuity from them. Annuity rates can vary a great deal, it is definitely worth shopping around to source the best deal for your individual needs.
Are there different types of annuities?
As well as different companies to choose your annuity from, there are many different products to choose from. Some carry more risks than others. A retirement specialist can help by reviewing your complete affairs before directing you towards your best options. What you choose will depend on your personal circumstances.
The basic annuity options are:
Single annuity – paying you an income that stops when you die.
Joint annuity – paying you an income until you die, which then continues to pay an income to your spouse or partner.
Guaranteed annuity – which allows you to specify that the annuity should continue to pay out for a minimum period. For example, a joint annuity guaranteed for 15 years would pay you an income until you die, then pay your spouse or partner an income until they die. If you both die within 15 years, then it will pay your beneficiaries an income for the remainder of the 15 year term.
Escalating annuity – standard annuities give you a level income, meaning the same amount is paid out each month for the entire term. Over time, the true value of this reduces because of inflation. To combat this you can take out an escalating annuity. This starts lower but increases, either by a set amount each year, or with increases in retail prices.
Impaired Health Annuity and Enhanced Annuities – when buying an annuity, the income you receive is based on your life expectancy. So people with reasons to expect a shorter life can receive higher rates than a conventional annuity. If you already have an existing condition such as cancer or have had a stroke or heart attack then an Impaired Health annuity may provide a significantly higher income. Certain postcodes may also receive better rates than others.
If you don’t have a specific medical condition but your lifestyle includes factors such as smoking, or if you were employed in a occupation that might affect your health, then an Enhanced Annuity may still offer you a higher income.
Fixed Term Annuity
A Fixed Term Annuity is designed to give you more flexibility and control in retirement. Available through financial advisers, it is a type of drawdown arrangement that provides a guaranteed income (within government limits*) for a term of your choice, from three years up to a maximum of 15 years.
You will receive a Guaranteed Maturity Amount (GMA) to reinvest in another pension product of your choice providing you survive until the end of the term. The level of income you can buy with the GMA is not guaranteed and could be higher or lower than the amount you received from your Plan.
Greater flexibility The GMA is not affected by investment performance risk and is known from outset. It gives you the ability to adjust your planning needs at the end of the Plan term to take account of changing circumstances, such as:
- Poor health – you may be fit and healthy today, but what if your health was to deteriorate later on in retirement? If it does, you may qualify for an enhanced annuity.
- Marital status – you might get divorced, married (or remarried) or your spouse/civil partner may die before you. If so, you might want to amend your Plan benefits to match your new status.
- Income needs – these may change later in retirement. For example, an inheritance from elderly relatives may mean you don’t need as much income from your pension fund later on in retirement as you do today.
You should also bear in mind the following risks
- Your selected level of income may be restricted during the term to ensure that it remains within limits set by the government (as adjusted by the government during the term)
- Your situation may change after your income payments have started, but you cannot change the level of income selected during the Plan term
- The higher the level of income you select at the start of the Plan, the lower the Guaranteed Maturity Amount will be.
A flexible Fixed Term Annuity allows you to approach retirement in a series of stages, rather than making a ‘once and for all’ decision on the day you stop work. It also has a unique conversion feature, available if you take out the option Plan Protection at the outset, which allows you to convert to an enhanced annuity before your fixed term comes to an end, providing you qualify.
When do you need to act?
You will have to buy your annuity before you reach the age of 75. Once you’ve bought one, you can’t change your mind. So, it’s important to get it right. We can help you compare like-for-like between the different annuity providers. Contact us for more advice.