Annuity

The level of income you’ll be able to get depends on your age, the annuity rate set by the insurance company, your health, what your pension investments are worth at the time and other options selected. Annuity rates tend to mirror interest rates. Annuity payments are taxed at source in the same way as your salary or a defined benefit pension payment would be.

There are many variables and options to consider when it comes to deciding on the right annuity for you, which is another good reason for taking professional advice. We outline some of these below.

• Inflation protection: you can accept a lower initial guaranteed income for life in order to ensure that your future payments rise with inflation. For those who may spend 20 or 30 years in retirement, this is an important consideration when it comes to future the purchasing power of your income.
• Value protection: one of the arguments you can make against an annuity (or any kind of guaranteed income for life) is that if you die young, your pension pot is effectively wasted. If that’s a concern for you, you can build in value protection when you buy an annuity, which allows for your original fund value, less the payments already made, to be paid out on death.
• Guaranteed periods: these allow you to opt for your annuity to be paid out for a specific number of years even if you die within this time.
• Joint life/single life: a single life annuity will just run until you die. A joint life annuity will then pay out to a second person until they die.
• Impaired life annuities: these offer a higher income to those people who have experienced health problems, such as diabetes or who have had certain jobs. This is often subject to a medical examination. Some individuals may be offered enhanced rates due to their lifestyle or physical condition, for example smokers or the clinically obese.
• With profits/unit-linked annuities: these are similar to a normal annuity in that a series of payments is made at selected intervals in return for a pension fund. The level of payment is also dependent upon age, annuity rate, size of fund and options selected. The main difference is that the initial pension level and future income levels are also dependent on the performance of the underlying with profits fund or unit-linked funds that the payments are made from.

Advantages Of Buying An Annuity

• You will receive a guaranteed income for life, and you can elect for your beneficiaries (for example a spouse or civil partner) to receive a guaranteed income or a lump sum less tax upon your death.
• You can usually combine taking one with taking some tax-free cash at outset.
• There are no additional charges applied to an annuity contract once in force. All charges are taken at outset and are reflected in the annuity rate offered.
• The contract is simple to understand, there is no need to review the contract and there is minimal paperwork needed to start the payment of benefits.

Disadvantages Of Buying An Annuity

• You don’t have the potential to benefit from future returns on your pension investments. But, on the other hand, you won’t be exposed to the risk of falling investment values either.
• The various options in relation to death benefits and increasing / decreasing income levels etc must be selected at outset and will result in a lower initial pension payment. These selected benefits cannot be altered in the future.
• You usually ‘lock in’ to a certain interest rate for life.
• To review the disadvantages of transferring from a secure benefits scheme click here.