Annuities Explained What to Do Before Purchasing an Annuity


It is important to ensure you get the best rate for your annuity before purchasing, as they are nearly impossible to change later. Your choices must be considered carefully and completely in order to get the best income possible throughout the rest of your life in retirement.

An annuity is normally purchased upon retirement, though not compulsory. They are typically purchased from pension schemes that include defined contribution or money purchase pensions, and help to provide retirement income, which is guaranteed for the rest of your life.

The income is then subject to income tax and paid to you either monthly or annually. If your pension scheme is defined benefit or final salary based, you will not need to set up an annuity, as your income will be provided by your employer’s pension scheme.

What Do I Do First?

Before purchasing your annuity, if you are on other schemes, there are many options to consider. Your pension provider will offer you a quote for an annuity from them. However, you have the right to shop around using the open market option (OMO). The value of your fund, provided by your pension provider, should be used for comparison.

Some pensions, especially older ones, offer a Guaranteed Annuity Rate (GAR), which can be higher than the options on the open market. The income offered by annuities has dropped over the last few years, so if your pension provider offers a GAR, it may be worth using it.

You can purchase an annuity beginning at the age of 55, but there is no requirement to retire when you receive your pension. However, the younger you are when you purchase an annuity, the less money you are likely to earn, as the provider will assume payment for a longer period of time.

What Else Should I Consider?

You should also consider whether to purchase a single annuity or joint annuity. With a single annuity, income is provided as long as you live, and you are likely to earn more income per year.

Have a look at our annuity comparison table below for more information on current rates tailored to you.

With a joint annuity, the income is provided until the death of the second partner, although it will be less per year. In addition, you can choose a joint annuity that will pay a reduced rate after the death of the first partner, allowing for more income at the beginning.

In addition, you might consider a guarantee period, which will allow for a minimum period of time for your annuity to be providing income. This is usually five or ten years, even if you die within this period. However, your family will not benefit if you die after this period.

Finally you need to choose between level and escalating annuities. Level annuities pay the same amount throughout your life. An escalating annuity increases over time, either by a set increment, such as 2% or 5% per year, or in association with inflation using the Retail Prices Index (RPI).

These will pay a significantly lower amount than a level annuity at first, outstripping it if you live long enough. You can also opt for a mixture of level and escalating annuities or use investment-linked annuities, though there are risks with the latter.

Additional Information

You can take 25% of your pension fund as a tax-free lump sum, called a Pension Commencement Lump Sum. This will reduce the amount of income you receive when purchasing your annuity.

If your pension fund is £18,000 or less, or under 1% of your standard lifetime allowance, you may be able to take the entire pension fund as a lump sum, with only the first 25% being tax-free. Your annuity is influenced by your lifestyle, occupation, postcode, or health, which could make you eligible for an enhanced life annuity, which pay more money on the assumption you will not live as long.

Related Articles

Annuity – Basics

Types of Annuity – Overview

Enhanced Annuity

Guaranteed Annuity

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