Pension Annuities

Pension annuities hit the headlines in August when interest rates rose, this means annuity rates have gone up! This is great news if you’re thinking of retiring now because you might be able to get more income. Whilst there is no longer a requirement to buy an annuity - don’t discount them.

What exactly is an annuity?

It’s a regular income paid in exchange for a lump sum from a pension pot, such as from personal and workplace pensions. Your pension provider will confirm the amount of income they will offer you closer to retirement in a retirement option pack, normally issued six months before the target retirement or on request. If you’re a little way off retirement, the provider will send you an annual statement but note the income figures aren’t guaranteed unless stated.

Did you know that the types of annuities and rates offered can vary significantly between providers?

The good news is you can take your annuity through another provider using an “open market option” - useful if your current provider doesn’t offer the highest income. A higher income can also be obtained if you have a medical condition or lifestyle factors such as smoking, in some instances increasing income by as much as 50%. Not every provider offers enhanced terms.

There are numerous types of annuities, two of the more popular types are:-

Conventional Lifetime Annuities - these pay a guaranteed income for life, no matter how long you live - it’s a type of insurance against living too long!! The amount of income is fixed at the outset and cannot be changed unless inflation-proofing is selected at the outset.

Flexible Lifetime Annuities - these broadly aim to provide the certainty of a conventional annuity with the prospect of investment growth in an attempt to offer the best of both worlds. Generally speaking Flexible

Annuities fall into two further categories -

Annuities with Flexibility and Fixed Term Annuities - Annuities with Flexibility are similar to conventional lifetime annuities but with a degree of income and/ or investment flexibility. Fixed Term Annuities provide a guaranteed income for a set period of time with a guaranteed or reviewable maturity date. However Flexible Annuities do not provide a guaranteed income for life.

How much income can I get?

This depends on the type of annuity chosen, the amount in the pension pot, age, health, lifestyle and even postcode. Generally the older you are when you purchase an annuity, the higher it will be.

What happens to an annuity on death?

It’s possible to pass your pension pot on after your death, but the option must be selected when the annuity is set up. You can choose for an income to continue to be paid to a spouse/dependents or beneficiaries. A capital protection option allows your beneficiaries to receive a lump sum on your death equal to the difference between the amount you paid to buy the annuity and the gross annuity payments received. Under both options, the payment will be tax-free on your death before age 75.

Is an annuity suitable for me?

Seek advice before buying an annuity, an AGFT advisor can explain all the options and outline the best type for you and shop around for the best rates based on your specific circumstances. There will be fees to pay for this but overall you’re likely to get a higher level of income.

Please note that an income from an annuity will not keep pace with inflation unless the annuity is set up to increase each year and the increase rates matches or exceeds inflation. The capital value and income from a Flexible Annuity could be less on maturity. There are also restrictions on how much can be paid into a pension for you once a Flexible Annuity has been set up.