FAQs
Frequently Asked Questions
Below are a number of questions that are frequently asked about annuities:
What is a pension annuity?
This is a policy that you can buy with your pension fund to give you a guaranteed income for the rest of your life.
Do I have to use all my pension fund to buy an annuity?
No. You are normally able to take up to 25% of your pension fund as tax-free cash.
What are the FSCS compensation limits on Annuities?
If the provider of your annuity were to go bust, you will qualify for compensation from the Financial Services Compensation Scheme (FSCS) on the basis of the annuity being Long Term Assurance. The level of protection is unlimited and is calculated as 90% of the claim. The claim would be based on the value of the annuity and should include the level of spouse’s benefits, inflation cover and other features that you have built into the annuity. For more details click here: fscs.
Where can I go to get an annuity?
You will normally be offered an annuity by your existing pension provider. However it is unlikely that this will be the best income annuity rate you can get. You have the right to an Open Market Option, this means your pension company will transfer your fund to another provider who can offer a higher annuity rate. Many large insurance companies provide annuities and there are other specialist providers which sell annuities that are tailored to the needs of retirement customers. At Click4annuities we aim to find you the best possible annuity rate for your circumstances.
What are the benefits of taking out an annuity sooner rather than later?
You do not actually have to use your pension fund to buy an annuity, but by taking out an annuity you will enjoy a guaranteed regular income until you die that can enable you to plan with certainty and spare you from having to monitor the progress of your pension fund and make ongoing investment decisions. We can provide (free of charge) a comparison between taking your pension now and delaying that decision for 12 months (or longer).
What are the risks and downsides of annuities?
Your pension options are fixed at outset and cannot be altered to take account of changes in personal circumstances. Your annuity income cannot be altered in value (except for standard increases from indexing payments). Hence there is a limited amount of flexibility and control of your payments. An annuity would represent poor value for money should you die early, depending on what death benefits you took out at the time of annuity purchase. The income you receive is dependent upon annuity rates at the time of purchase. There is no possibility of benefiting from future investment returns with a conventional annuity.
What is the open market option?
The open market option entitles you to shop around the entire market for the most suitable annuity deal at the point at which you decide to use your pension fund to buy an annuity. Using the open market option can secure you a higher income than the annuity offered by your pension provider and, if you have health problems and qualify for an enhanced or impaired annuity, you could secure a much higher income still.
What is an “enhanced” annuity?
Enhanced or impaired life annuities, offered by certain specialist providers, provide an income boost to those with health problems, to smokers and other health related conditions. They will pay an income which is higher than a standard annuity.
Will my partner get any money from my annuity when I die?
If you choose a standard single-life annuity your partner will receive nothing when you die, but there are three annuity options that enable you to provide for your partner – or other dependants.
- A joint-life annuity will pay some or all of your annuity income until the death of your surviving dependant.
- An annuity with a guarantee period will ensure that income payments continue for a period of up to 10 years from the start of the annuity if you die earlier.
- If you die before the age of 75, a value protected annuity will pay a lump sum of up to the original fund less any payments made before your death – subject to a 55% tax deduction.
The level of your dependents pension and any other death benefits are chosen at outset, and choosing any of these options would mean a lower initial income.
What are the other options to taking out an annuity?
You don’t have to take out an annuity. You can instead opt for an “unsecured pension”, which enables you to draw an income while leaving your pension invested in shares and other assets. An unsecured pension (also known as income withdrawal or drawdown) affords greater flexibility than an annuity in the sense that it enables you to choose – subject to an upper limit – how much income you take and when you take it. To find out more about your options please give us a call.
Do members of all types of pension schemes have to buy an annuity?
No. Annuities are only relevant to members of “money purchase” or “defined contribution” schemes. If you are a member of a “final salary” or “defined benefit” scheme your employer is responsible for ensuring that there is enough money available at the time you retire to pay your pension.
Where can I get more information about annuities?
We have produced a customer guide about annuities and you can download it here. Guide to annuities
Other organisations such as the Financial Services Authority (FSA) also produce independently written information sheets and guides. The most comprehensive way of finding out about annuities is to call or email us to discuss your individual requirements.
You can view the FSA’s Money made clear website here, just click http://www.moneymadeclear.org.uk
