Annuities

Picking a good-value pension annuity rate could give your pension a significant lift.

Anyone currently paying into a personal, stakeholder or money-purchase pension scheme will probably have to buy an annuity to fund their retirement. Under current rules, you have to convert the money you have built up in your pension scheme into an annuity before you reach 75.

There are significant differences in the performance of the best and worst pension annuity rates and the advice of an independent financial adviser should be sought to ensure you get the best annuity rate.

An Annuity Explained

An annuity converts a lump sum (usually a pension fund) into a regular income that will last as long as you live. The income is taxable and the amount that you get each year will depend on the size of your fund, the pension annuity rates the annuity company offers, your gender, age and health, and the type of annuity that you opt for. You are allowed to take up to a quarter of your pension fund as a tax-free lump sum and most convert all of your remaining pension fund into an annuity before the age of 75.

Which Annuity?

Most people opt for a conventional lifetime annuity, but there are several options to pick from.

  • Level annuity Your income will stay the same each year irrespective of inflation.
  • Increasing annuity This can either match inflation for the rest of your life or rise by a specific percentage each year.
  • Guaranteed annuity This will continue to pay out for a time to a nominated individual if you die soon after retiring.
  • Joint-life annuity A joint life annuity gives your partner some or all of your continuing income if they outlive you.
  • Investment-linked annuity If you have a larger pension fund, you may prefer to invest it in the stock market. This means that your annual income could go down as well as up.

 

Explore your options

Many people assume that they have to buy an annuity from the company that has held their pension. This is not the case, as you have the right to shop around for the best pension annuity rates when you retire – it’s called the open market option (OMO). Worryingly, figures from the Association of British Insurers (ABI) show that 61 per cent of people who bought an annuity in 2007 did not shop around in this way.

Get the best deal

There are huge differences between the level pension annuity rates offered by the various annuity providers – underlining the fact that you should use the OMO.

Checklist

Follow these tips to get the most from your annuity
  1. Choose the best option. Shop around for the best pension annuity rates using the open market option and don’t just accept what your pension company offers.
  2. Get good advice. It is important to talk to an independent financial adviser who specialises in annuities before you make your decision.
  3. Think about inflation. You can make your annuity ‘inflation-proof’ by having it icrease in line with price rises, although you’ll start off with a lower income than if you’d chosen a level rate.