Annuities Explained

Starting your retirement planning journey is a significant milestone. Once you’ve written down your bucket list of where you’re going to go on holiday, the most important decision you’ll make is how to secure a stable income for your retirement years.

Recently, Annuities have been making quite the comeback, given that annuity rates generally increase when interest rates do. In this guide, we’ll delve into the nitty gritty of Annuities so you can feel more informed about the decisions you need to make about your retirement income strategy.

Understanding Pension Annuities

A pension annuity is a financial product designed to provide a guaranteed income for the entirety of your life, and isn’t impacted by how long you live or how the stock market fluctuates. You trade a lump sum in at a set rate, which indicates how much income you will receive until you pass away. As this income stream is guaranteed, it can provide peace of mind to those with a lower tolerance for investment risk in particular.

Accessing Your Pension Funds

Typically, individuals can opt to withdraw 25% of their pension as a tax-free lump sum and either move the rest into Income Drawdown or use it to purchase an Annuity – or sometimes a combination of both.

You can also choose not to withdraw your entire pension at once, and you aren’t tied in to making a decision straight away. Various retirement options are available to you, so you can tailor your choices to meet your particular needs.

Comparing Annuity Rates

Annuities are offered by numerous insurance companies, each with varying rates. It's essential to note that your current pension provider might not provide the most competitive rate. To secure the best deal, it's advisable to compare annuity quotes from different providers. At Annuity Central, we can help you do this. We have access to the Whole of Market and compare your options for you, making sure you get the best possible deal.

Factors Influencing Annuity Income

Several factors impact the amount of annuity income you may receive:

• Size of Your Pension: The more pension allocated to the annuity, the larger the income.

• Annuity Rates at Purchase: Influenced by gilt yields, responding to interest rate changes.

• Age, Health, and Lifestyle: Older individuals may receive higher annuity incomes, and disclosing health conditions can lead to enhanced annuities.

Customising Annuity Features

When setting up an annuity, various options allow you to customise your income:

• Rising Income: Opt for an increasing income over time.

• Payment Frequency: Choose monthly, quarterly, semi-annually, or annual payments.

• Spouse's Benefit: Decide if your spouse will continue to receive payments after your passing.

• Guarantee Period: Ensure income continues for a set duration even after your death.

• Value Protection: A lump sum for beneficiaries upon your death.

• Index-Linked: Align annuity income with an index like inflation.

• Increasing Income: Set your income to rise by a fixed percentage annually.

Tax-Free Cash Option

While you can withdraw up to 25% of your pension tax-free, you don’t have to. You might want to use your entire pension to purchase an annuity, rather than taking any tax-free cash, or you might choose to invest your tax-free cash for future growth.

Guarding Against Inflation

Given the potential long-term nature of annuity income, addressing inflation is crucial. Options to protect against inflation, like annual increases, exist but may reduce initial income. You may decide that inflation isn’t too big of a deal as your expenses are likely to decrease as you get older – the choice of annuity features is entirely up to you.

Payment Frequency and Continuation After Death

You can choose how often you would like your income to be paid, whether in advance or in arrears. You can also decide whether you want your income to continue after your death, should you pass away within a certain time period. This is known as a “guarantee period”, and can last up to 30 years from the date the annuity begins. The length of time is again completely up to you, but can impact the amount of income you receive.

Qualifying for Higher Income

Lifestyle and health choices can qualify you for higher income through enhanced annuities. A smoker for example would generally receive a higher income than a non-smoker, due to their expected reduction in life expectancy. The same applies to people who have suffered from a heart attack or stroke, as well as with long-term conditions such as diabetes. Be honest about your health and lifestyle choices when it comes to setting up your annuity, to make sure you get the best rate.

Transferring Pensions

Consider associated fees and guarantees before transferring a pension; existing arrangements may offer better terms. For example, a Defined Benefit pension may have additional benefits that you would lose should you exchange your pension for an Annuity.

Applying for an Annuity

Annuity quotes have time restrictions and don’t stay valid forever, so you need to lock in your application within the specified timeframe to make sure you get the rate you were quoted. Your health and lifestyle choices are only considered at the time of application. This means that should you develop any health conditions after securing your guaranteed income, this will not impact the rate that you receive. Your annuity rate cannot be changed once it has been set up, so it is worth talking to a professional (like us) about the options available to you.

The Safety Net

In the rare event of an annuity provider's insolvency, the Financial Service Compensation Scheme serves as a safety net. This means you aren’t at risk of losing your guaranteed income.

Exploring Alternatives

If a pension annuity doesn't align with your goals, alternatives like drawdown or lump sums exist. Combinations tailored to your needs, such as "flex then fix," are common.

We can have a discussion with you about the options available, to make sure that you choose what’s right for you. We might be called Annuity Central, but we are always unbiased and have your best interests at heart. If an Annuity isn’t right for you, then we won’t recommend you take one.

If you want to know more about the options available to you in retirement and get a tailored annuity quote, get in touch with us at Annuity Central by calling 0191 375 8454 or emailing us at info@annuitycentral.co.uk.