Annuity Options

What is an Annuity?

When you reach retirement from the age of 55 you are permitted to take a tax free lump sum in most circumstances, and use the remainder of your fund (usually) 75% to purchase an annuity. An Annuity promises to pay you a regular taxable income for the rest of your life, in exchange for your remaining pension fund.

Annuities are generally provided by Insurance Companies, but you do not have to use the same insurance company as you may have had your pension with. It is important to shop around to get the best rate you can buy, as once set up, the basis of your annuity is fixed and offers a secure income. Your income will be guaranteed for the rest of your life. However, because the income is fixed it is important to choose your options carefully. Once it is set up you cannot change your mind, and your pension fund no longer exists.

Impaired Life/Enhanced Annuity

What is an impaired life or enhanced annuity?

As per the general description of Annuities, these contracts offer a higher rate of income for annuitants who are either in poor health or have lifestyle factors which affect their anticipated life expectancy, such as smoking.

This is one of the important reason why you should not automatically opt for the annuity offered to you by your existing pension provider, as you may be able to obtain a better rate of income in retirement elsewhere.

These types of contract are assessed individually by providing details of any medical conditions that you may suffer from, or details about your lifestyle which an underwriter may deem significant when assessing your life expectancy.

Some preferential rates are available depending on the area of the UK in which you live. So called postcode annuities reflect the difference in longevity in certain areas of the UK compared with others.

In short there may be a number of criteria you may have which could improve the annuity rate that you can secure, so it is always important to review and assess these options individually with an adviser.

Fixed Term Annuity

What is a Fixed Term Annuity?

A fixed term annuity guarantees to provide you with a guaranteed maturity amount at the end of your fixed term which would allow you to purchase another annuity, or an unsecured income (see below).

The guaranteed maturity amount aims to provide you with an amount of money to purchase another annuity with the same level of income (based on current annuity rates) you originally received. A fixed term annuity can be provided for 5,6,7,8,9,or 10 years.

A fixed term annuity is subject to the 3 year GAD (Government Actuary’s Department) review, which alters the maximum income that can be taken by pensioners.

The Fixed term annuity offers death benefits similar to an income drawdown plan. If value protection is added to your contract then should you die during the term of the contract the original net investment minus any withdrawals will be paid to your chosen beneficiaries. You should note that if the guaranteed maturity amount is not reinvested into an appropriate pension product there will be a tax charge of 55%.