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An annuity is an insurance policy, which gives a guaranteed income for a period of time (usually for the rest of the policy holder’s life) in exchange for a large upfront lump sum. Once a policy holder reaches retirement they may convert the pension pot they have saved over the years into a regular pension paid every year, usually on a monthly basis.
Annuity providers usually give the policy holder the choice of taking up to a quarter of the pension pot they have saved as a tax free sum of cash. The rest however, needs to be used to purchase an annuity. The annuity provider calculates how long you are likely to live – depending on various factors such as age, gender and health – and offers to pay you a rate dependent on their calculations, and also on the amount you have managed to save.
There are many different types of annuities that a pension saver can convert their pot to. Most are conventional annuities which pay a guaranteed, risk free income to the policy holder for the rest of their life.
Are annuities a good investment?
The current economic problems and stock market uncertainty means that annuities have lost value in recent years. Increasing longevity also means that the annuity rates offered these days are a fraction of what they were just ten to fifteen years ago. Twenty years ago a retiree who had saved a pension pot worth £100,000 might have received an annual income of £18,000 through their annuity. Nowadays somebody retiring with the same £100,000 saved would probably receive an annual income of just £6,000.
Fill in our annuity enquiry form to speak to an independent financial advisor for more information on annuities, and your options.
Despite their falling value, annuities are a guaranteed source of income – and offer financial security for the rest of the policy holder’s life. The peace of mind that an annuity can offer can often be worth more to someone than just the economic value of the income they receive.
Its estimated that almost twenty per cent of the British population make live to be 100 – if they retire at 65, they are guaranteed an income for life, even if they live another 35-40 years. Though many investment opportunities offer better returns, over the long run none can match the security of an annuity.
Have a look at the annuity comparison table below for more information on current rates.
One factor to consider is that most annuities offer very little flexibility. Once someone buys one, they are usually stuck with it for life, without the chance to change it or make adjustments to it. This is why it’s extremely important to choose the right annuity.
Have a look at our annuity calculator for information on an annuity rate to suit you.
What types of annuity are available?
As already mentioned there are many different options available for an individual considering buying an annuity. There are conventional ‘fixed’ annuities which will pay the same income every year. The problem here is that over time the effects of inflation will mean the true worth of a fixed annuity will decrease. Someone who lives to be a hundred will find that their income buys a lot less than it did when they first retired at 65.
Alternatively, a retiree can buy an inflation linked annuity – where income increases in line with RPI or CPI. The benefit of such an annuity is obvious – one’s income increases over the years. However the catch is that they will initially pay out a lot less then a conventional annuity, before building up over time. If an inflation linked annuity holder dies at a relatively young age – they will have lost out. The true value of such an annuity only becomes apparent if the policy holder lives to a grand old age.
Another option is to invest in an investment linked annuity – one which follows the stock markets. Many experts believe that someone retiring today should opt for a combination of annuity types.
What is an enhanced annuity?
For those in poor health, or even those who are smokers or have other habits which may reduce their life expectancy, there is the option of an enhanced annuity. Due to the fact that they are likely to live a shorter life than average, enhanced annuity holders will receive a much better annual income than conventional annuity holders.
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