Annuity

What is an annuity?

An annuity pays you a guaranteed regular income for the rest of your life.  The money to purchase an annuity will usually come from the pension fund which you have built up over your working life.

Traditionally the amount you got from your annuity (the annuity rate) depended on the life expectancy of someone your age and gender.  However, we can now get annuity providers to look at your individual health and lifestyle to get you a higher annuity rate.

All insurance companies pay different annuity rates, so you should always exercise your right to shop around for the best deal on your annuity (known as the Open Market Option).  By using the Open Market Option to shop around you could receive a significantly higher annuity for the rest of your life.

We can guide you through the process of selecting and buying the best annuity for your circumstances. 

Call us free on 08000 842 265 for a personal annuity quotation or even if you just have a question about annuities.

What options can I have with an annuity?

A Single Life Level Annuity will pay you (the annuitant) an income until you die.  This type of annuity will pay you the highest initial income. 

There are, however, many options that you can add to a basic annuity such as a spouse’s pension or escalation. Adding additional benefits to an annuity will reduce the initial pension paid and we recommend talking through the options with us before making any decisions.

Some of the most popular options include:

•    Tax Free Cash.
•    Determining how frequently the annuity income is paid.
•    Escalation.
•    Death Benefits and Spouses or Dependent Pensions

Tax Free Cash
Most people have the option to withdraw a lump sum of up to 25% of their pension fund as tax free cash.  Annuity income from a pension is taxed as earned income so it usually makes sense to take the maximum Tax Free Cash.

Timing & Frequency
Annuities can be tailored to pay retirement income monthly, quarterly, every six months or even annually. This can then be received either in advance or in arrears.

Escalation
It’s critical to consider how inflation may affect retirement income over time as one of the biggest financial challenges of retirement is budgeting to live on a fixed income.

Most annuities offer options to automatically increase income each year by a set percentage (usually 3% or 5%) or by linking to a measure of inflation such as the Retail Prices Index. These options will reduce the initial income from the annuity because the income paid will increase each year.  However you should remember that increases in the cost of living will reduce the real value of  a level annuity over time.

Inflation of 5.7% per year (the average inflation rate over the last 60 years) could reduce the real value of annuity income by 50% in just 12 years.  We can provide (free of charge) an individual chart to help you compare the level and escalating annuity rates you can get. 

Death Benefits:  Payments will stop when the annuitant dies unless options to protect the annuity have been chosen when the annuity is purchased, such as; 

1. Joint Annuity
   If selected this option allows the income from an annuity to transfer to a spouse or civil partner in the event of the annuitants death.  Different amounts of the annuitants income can be covered in this way, for example 50%, 66%, 100% or a particular percentage depending on your financial needs and circumstances.  In the event of death the income paid to the spouse or civil partner will be taxed as income at their marginal rate.
2. Guarantee Period
   If the annuitant were to die soon after starting their annuity, their income would ordinarily stop and no further payments would be made.  A ‘Guarantee Period’ will ensure that income will continue to be paid until the end of the guarantee period, which is usually 5 or 10 years from their first payment.  A 5 year guarantee is a very cheap option and is automatically included in many standard annuity quotes.  The longer the guarantee, the less the initial income will be.  The annuitant can nominate anyone to receive the income from the guarantee either directly to the annuity provider or through a will.  In the event of death the guaranteed payments will be taxed as income at the recipients marginal rate.
3. Value Protection
   Value Protection (sometimes known as annuity protection or capital protection) is an option that returns a lump sum if the annuitant dies before their 75th birthday, giving the ability to protect a percentage of the pension fund, right up to 100%.  The lump sum payable on death is the percentage of the pension fund that is protected, less the total gross income already paid to the annuitant(s) as an income. The lump sum, if paid, will be taxed (currently at the rate of 55%) before it is released to the nominated beneficiary and is not normally counted as part of the estate for inheritance tax purposes.
4. Overlap
   This is an option that allows the annuitant to choose when they’d like a dependant’s annuity to start, if they have opted for both a Joint Annuity and a Guarantee Period. Should they die during the guarantee period, dependant’s annuity payments can start either at the end of the Guarantee Period or from the date of the annuitant’s death.
5. Proportion
   If the annuitant chooses to be paid yearly “in arrears”, there is a further option to make a final payment on their death to their beneficiaries. This is known as ‘proportion’ and the payment covers the period between when the annuitant dies and when their last payment was received. If income is paid monthly and doesn’t include proportion, there will be minimal impact as the most that could be lost is a month’s income (if the annuitant were to die on the last day of the month).

Call us on 0800 0842 265 for a free annuity quotation.