What are annuities?
Buying an annuity from an insurance company or specialist provider can provide you with a guaranteed income for the rest of your life or a fixed number of years. The annuities market has gone through great change in recent years and is currently subject to a Government consultation which could result in further changes. For the latest information book a review with a trusted local adviser.
Income for life
Buying an annuity used to be the standard option ( compulsory until 2006) for those reaching retirement with a defined contribution pension scheme. However since the introduction of pension freedom there are a number of different options available to pension holders.
One of these options is still to buy an annuity to provide you with a guaranteed income, either for the rest of your life or for a fixed number of years. They remain a popular option for those wanting certainty of income in the future. You can also decide to use part of your pension pot to purchase one and the rest to take as a tax-free cash lump sum. Alternatively pension holders are using pension freedom to withdraw all of their pension savings to spend, save, or invest as they choose.
Making the right choice
When purchasing annuities it’s important that you buy the right one for your personal circumstances as once set up they can be difficult or even impossible to change. There are different types of annuity available, which provide different levels of income for you and possibly for your dependants. The level of income offered by a particular type will depend on the provider and the options that you select.
The different types of annuities available today include:
How much will you receive?
The amount of income that you will receive from an annuity depends on a number of different factors:
- Your age when the annuity starts
- The term of the annuity
- The amount available to buy the annuity
- Interest rates and future investment returns
- The options you select to be included
Some providers may also take into account other factors such as health, lifestyle and where you live. The amount of income that different providers will offer for a given purchase price can vary significantly, so use a financial adviser who will shop around for the best deal.
The income paid by an annuity is taxed as income. The annuity provider will usually deduct tax using your tax code, before paying the net income to you.
The income you’ll receive from your annuity will be heavily influenced by the options you select when purchasing it. These options will include how much you take out of your pot as a tax-free cash lump sum before buying the annuity, the frequency of your required income payments and if you need payments in advance. Other options to consider are if you need escalating payments to counter inflation and if you wish to guarantee payments for a period after your death.
There are other issues for those who want to consider a joint life annuity or proportional payments after death. Each option can reduce the starting amount of income that it will provide, but some, such as escalation or joint life annuities may mean that more income is paid out over the lifetime of the annuity.
Some annuities may be more suitable than others for your particular circumstances. You may want to consider talking to a financial adviser to help you choose the most suitable one for you. Book a free initial review here.