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, 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.
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 10 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 10 years, then it will pay your beneficiaries an income for the remainder of the 10 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.
How important is it to get advice?
Once you've bought an annuity, you normally 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.
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