Annuities

You now have more pension options than ever before which can be a bit daunting.

Some of the options available to you are:

• Leave your pension pot untouched
• Use your pot to buy a guaranteed income for life also known as an Annuity
• Take small cash sums from your pot
• Take your whole pot as cash
• Use your pot to provide a flexible retirement income also known as Pension drawdown

So if you’re unsure what to do with your pension savings or want to find out more about your options, go online and visit Pension Wise, a free and impartial government service that offers guidance to people approaching retirement. Pension Wise now falls under the Money and Pensions Service. You can also arrange a phone or face-to-face appointment with a pension specialist.

With a pension annuity you have options, which you’ll need to pre-select at the outset, and these can include provision for your loved ones, following your death.

These options include:

• Guarantee Period: It costs relatively little to secure a guarantee period with most annuities. It works by providing a guaranteed period over which the annuity will be paid. The annuity will continue to pay to your beneficiaries over this guaranteed period if you die during this initial term.

• Value Protection: This option can return a lump sum to your beneficiaries if you die without having received the full value of your pension fund. It is sometimes known as annuity or capital protection and is more commonly offered by enhanced annuity providers. The older and less healthy you are, the more this option will cost.

A pension annuity is still the only product that will give you a guaranteed income for life paid regularly to you for the whole of your retirement.

You can also enjoy:

• The reassurance of knowing exactly how much you can expect in each payment
• Peace of mind that your income will continue exactly how you have set it up to – no matter what the stock market does
• Flexibility to set up your annuity to meet your needs, whether that’s providing for loved ones following your death or keeping up with inflation
• The ability to take up to 25% of the pension fund as tax-free cash

Tax-free cash

At the point you decide to start taking your pension fund as income, you can choose to take up to 25% of your fund as a one-off payment, free of tax. Of course, you don’t have to take any at all if you prefer.

With some providers you can choose to take additional cash lump sums, however anything above this will be taxed at your marginal rate. But beware, the more you take out at this stage, the less you’ll receive in your regular payments.

Health and lifestyle factors considered

Current and past health conditions and your lifestyle, as well as those of anyone who is named on the annuity, could significantly increase your annuity income. By giving HUB Financial Solutions as much detail as you can, from your postcode through to your lifestyle and medical history, they could help you achieve more income during your retirement.

Protection from inflation

You can choose for your income to remain at the same amount, as it was the day you set up the plan. Or, you can choose for it to increase annually to offset the effects of inflation, however this will result in a lower starting income.

Choice of payment frequency

You can choose how often you want your annuity income to be paid. For example, you may want to receive it monthly or annually, or perhaps every six months? You can also choose whether you want to be paid in advance or arrears.

An enhanced annuity can pay you a better income than a standard pension annuity, as it takes into account your lifestyle as well as your medical and occupational history. Where your health and lifestyle could impact your life expectancy, it may be shorter than expected, annuity providers calculate that they’ll have to pay you an income for a shorter amount of time, so can afford to pay you more during that period.

If you live longer, you’ll still receive the same heightened level of income – annuity payments are guaranteed for life, however long that may be.
Importantly, enhanced annuities are priced according to your individual specifications, so may consider some or all of these factors:

• If you are overweight
• If you smoke
• Your previous occupation (if you have worked with asbestos for instance)
• If you've had a previous or current health problem that could limit your life expectancy (such as a heart attack or high blood pressure)
• Your postcode (life expectancy can vary quite a bit depending on where you live)

While all of this is unpleasant to think about, you may be able to secure a far higher retirement income by purchasing an enhanced annuity – as long as you are completely honest on your application. You don’t even need to have a serious medical condition to qualify; if you have any form of health or lifestyle condition that could impact your life expectancy, even something as simple as drinking alcohol, you could receive an increased income (though the level of uplift will depend on the severity of your condition).

One feature of an annuity is that it is only paid for as long as you live. This is always the case, whether you die one year, 10 years or 45 years down the line.

However, a Guarantee Period works by providing a guaranteed period over which the annuity will be paid.

This is usually over five or 10 years, although some providers limit the Guarantee Period to 30 years.

The annuity will continue to pay over this guaranteed period if you die during this initial term. However, should you die after the guarantee period ends, the annuity will stop paying unless a dependant’s benefit has been included.

If you're considering a Guarantee Period so that your spouse or partner has an income for a time after you're gone, you could also consider a Joint Annuity. You can consider this whether you are choosing to take a Guarantee Period or not. Although a Joint Annuity will pay a lower income than an annuity just for you (especially if your partner is younger or healthier than yourself), it will continue to pay until you both die. The payout to your spouse or partner will depend on the choices you make when you take out the annuity.

An escalating annuity will pay you a lot less at the start than a level annuity. However, your income will increase every year and could eventually outstrip the level annuity – but only if you live long enough. It will take quite a few years for an escalating annuity to 'catch up' with a level annuity, and a good few years more before you will have received as much income. Maybe as many as 20 years.

An alternative to fixed rate escalation is to select an annuity linked to inflation.

Remember, you don’t have to buy your annuity from the company that you’ve got your pension savings with. There may be a better deal elsewhere, so it could pay to shop around.

In fact, the Financial Conduct Authority (the industry regulator) have put in place 'information prompts' to appear alongside every annuity quote – to encourage consumers to shop around for the best annuity rates available, and help people be better informed.

HUB Financial Solution’s handy online tool is designed to help you compare annuities and guarantee your income for life.

Compare annuities with their Online Annuity Planner today