Q: What is an annuity?
You can receive an annuity by trading in lump sum. It is a kind of insurance policy which provides a regular income for you once you have retired. Typically, a person will build up their lump sum through a pension plan. The larger this pot is, the more income you will receive when you retire.
Taking out an annuity is somewhat of a life insurance policy in reverse; having one means that you should eliminate the risk of outliving your savings. You can ensure that you receive a regular income until your death. Annuities can also help you to protect your beneficiaries in the event of your death.
You also have the choice to take up to 25% of this lump sum as tax-free money when you retire.
Q: Am I eligible to buy an annuity?
From April 2011 purchasing an annuity has no longer been compulsory; however, it is the common choice for most people, apart from those who are a member of a private company scheme.
You can buy your annuity anytime from the age of 55.
Q: How do I choose the right annuity to buy?
This is a good question because it is important to realise that you do have a choice when it comes to who you purchase your annuity from. You do not have to buy it from the same company who runs your pension scheme. Make it a point to shop around and do your research; the difference between some companies could be as much as 25%, so it pays not to buy the first annuity you see.
Several things will influence your choice. You need to choose whether you want your income to remain the same every year after you retire, or whether you would like the amounts to differ. If you want the amount to increase every year, for example, you may start with quite a low income. You may also want the amount to change depending on inflation, or the performance of your investments from year to year.
You must also decide whether you annuity will pay an income to your spouse or partner after your death, and how much this income will be. A joint-life annuity can drastically reduce your annual income.
Q: What else should I be aware of when buying an annuity?
Look into whether you qualify for an ‘impaired life annuity’. This may be because of a history of poor health in your family, or if you are a smoker. This could mean that you receive a higher income, to make up for a possibly shorter life expectancy. Many people don’t realise that they are eligible for this. However, if you apply, you should be aware that it could involve medical testing and providing evidence.
Don’t be afraid to ask for advice from a financial expert. They may be able to advise you on the best annuity to buy in the light of your current and future circumstances.
Thinking of Retiring Soon? Have a look at our Annuity Comparison Table