Annuities Explained Conventional Annuity

What is a Conventional Annuity?

A conventional annuity is the simplest annuity to understand and generally gives the highest possible starting income for an annuity. Because of this, conventional annuities (also known as single-life level annuities) comprise the vast majority of annuities sold each year.

Essentially, purchasing an annuity involves handing your pension pot over to an annuity provider in exchange for guaranteed income for life. The income you subsequently receive is guaranteed until the day you die, unless you opt for an investment-linked annuity which could see your income growing or contracting based on how investments perform.

You can buy an annuity from the age of 55. The annuity income you receive is based upon your age, size of your pension fund, and gender, though from 20 December 2013 all annuities will be “unisex” and rate will be the same for men and women. Until 20 December 2013, men will continue to receive more annuity income compared to women with the same-sized pension pot because men have shorter life expectancies. It’s worth noting that some companies have different figures for life expectancy so annuity quotes can differ between insurance companies.

More options, lower rates

Whilst a conventional annuity will generally offer the highest starting income, it is not inflation-proof, meaning that over the years a conventional annuity will continue to pay the same level of income while inflation erodes is spending power. However, annuities can include built-in options, if you so choose, that can do things like guarantee an inflation-linked rise in income each year. While this lowers the initial income you receive, it can provide peace of mind to know that your spending power will not be eroded by 20 years of inflation over the course of a normal retirement.

While a conventional annuity is single-life, which means that it “dies” with you, there are also joint-life annuities that ensure that your partner will continue to receive an income should you die. Again, these generally pay less than a conventional annuity because of the built-in protections.

Another option is a guaranteed annuity, which pays out for the rest of your life, but also continues to pay your estate for a guaranteed period in the event that you die soon after retirement. For example, if you set up a lifetime annuity that has a guarantee of 10 years and you die after just 4, your estate will continue to receive payment for a further 6 years.

Different Views

Insurance companies can have different views on life expectancy. For example, whether or not life expectancy based on where you live is taken to account varies from provider to provider. Therefore the types of annuity rates on offer vary widely from one company to another.

It is always a good idea to shop around for the best annuity deal.

Health Problems

If you have health problems, or are a smoker, it is likely that you will be able to benefit from an enhanced annuity, which pays more than a conventional annuity.

Enhanced annuities are sometimes called impaired annuities or smoker annuities, but they all have one thing in common: higher levels of income because of illnesses, disorders or lifestyle factors that shorten your life expectancy. These ‘impaired’ annuities do not just count for serious conditions such as cancer or heart problems – even minor or common conditions can sometimes increase your annuity income so it’s always worth asking the question and being completely honest during medical evaluations.

Thinking of Retiring Soon? Have a look at our Annuity Comparison Table

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