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Retirement Annuities

Retirement annuities provide a guaranteed regular income for the rest of your life and can include a spouses pension.

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Post Retirement

Retirement Annuities

Retirement Annuities are designed to provide you with a regular and guaranteed income for the rest of your life, and if considering this option on retirement, it is important to choose an annuity that reflects your needs and those of your spouse in retirement.

For some people an annuity is the most suitable way to get a pension income during their retirement, especially if they wish to avoid any potential risks in reinvesting their residual retirement fund and the prevailing annuity rates are strong. However, for Defined Contribution type pension funds, annuities should always be compared against an ARF alternative.

Adding a spouse’s pension, guaranteed period, and or inflation protection lowers the original pension payment (annuity). So, again, careful individual assessment and expert financial guidance is needed here.

Retirement Annuity

Post Retirement

The Annuity Option

If you have a Defined Contribution Pension, (Employer Scheme or Private) then rising interest could certainly make an annuity more attractive, but it should be remembered that annuities end on the death of the annuitant, unless a spouse’s pension (up to 50%) or a guaranteed period (up to 10 years) is built in at set up.

Post Retirement

Types of Annuity

There are several different annuities available on the market and there are also a range of optional add-ons.

  • The standard annuity is a “level annuity”, which means the payment amount is set from when you purchase your annuity, and you will continue to be paid this same amount until you die. These types of annuities pay a higher starting pension income than other types of annuities, but your income will always stay the same, so the buying power of your pension income will reduce each yearbecause of inflation.
  • A “single life” annuity provides a pension income for you until you die.
  • A “joint life” annuity allows you to buy an annuity for yourself where part or all your income continues to be paid to a nominated survivor, such as your spouse, civil partner or partner. You can decide how much pension income you can afford to continue (as a percentage of your own income). The higher this % is, the lower your income will be.
  • You could choose an annuity that guarantees an income for a set number of years, regardless how long you live. Typically, you could choose a 5 or 10 year guaranteed payment period, which means that if you die in the second year of a 10-year guaranteed payment period, your dependants will continue to receive the pension income for the next eight years, or the insurance company may offer an immediate lump sum payment.
  • You could choose an annuity which pays back on death the amount you invested in the annuity, less all pension income payments received by you. This is called a ‘capital protected’ annuity.
  • If you are in bad health or a smoker at the time of retirement, you may qualify for an increased pension income payment, higher than would be paid to someone similar in good health and a non-smoker.
  • Some insurance companies offer annuities that protect, in whole or part, your pension income from future inflation These types of annuities are typically called “escalating annuities” and mean your pension income can rise each year. Typically, you will be offered a fixed rate of increase e.g., 3% per year. However, choosing this type of annuity means your initial pension income will be lower.

Remember:
Some of the optional extras will affect the level of pension income you receive: the more add-ons you choose, the more it will cost you and the lower your pension income will be. Make sure to talk to your Financial Broker about what you want to achieve with your annuity, and they will guide you through the range of options.

Post Retirement

Weighing up the Annuity Option

Like all choices in life, Annuities offer both advantages and disadvantages, so we have set out your considerations below:

Advantages

  • Lower risk than other retirement products.
  • Will pay you an income no matter how long you live.
  • If you are in bad health or a smoker, you may qualify for a higher level of pension income.
  • You can choose an option that will enable you to provide for your spouse, civil partner or partner when you die.
  • You can choose an option that protects your pension income from inflation.

Disadvantages

  • Once you’ve bought it you can’t cash it in, swap it for something else or change your annuity options.
  • The level of your pension income is not flexible.
  • Depending on when you die, you may get back less than you paid in.
  • Unless you choose otherwise your spouse or partner will not be provided for and your payments will not be protected against inflation.
  • The options you choose affect the level of pension income you receive, e.g., the more options you add, the more it will cost and the lower your pension income will be.

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