Annuities Explained

Ready to retire and start enjoying all that money you have been paying into your pension? Unfortunately, it’s not as easy as simply withdrawing the money – you need to convert it to an income which typically means buying an annuity.

 

 

 

Simply put, an annuity is a retirement financial product where you exchange a lump sum for an income paid by an insurance company. For pension schemes this means exchanging your pension fund for an income payable for the rest of your life known as a “compulsory purchase annuity”.

The income you receive from your annuity will be determined by factors such as your age, sex, lifestyle and general state of health – effectively how long you are expected to live.

 

The majority of people tend to simply buy an annuity from their existing pension provider, however this typically means they are not getting the best deal and could be missing out on as much as 30% extra annual income as a result.

The downside of annuities is that once you have handed over your lump sum of money in exchange for a regular income, you cannot cancel it and get your lump sum back. This means if you die shortly after buying an annuity, you will not receive anything like the amount you will have paid in, though there are steps you can take to protect yourself from this which is why consulting a financial adviser when considering an annuity is a wise option to ensure you get the most suitable product for you.

 

 

Who needs to buy an annuity?

 

If you have a lump sum of cash and wish to convert it to an income, you can buy an annuity. The majority of people only really require an annuity for the first time when they are reaching retirement and are required to convert all, or part of their pension fund into an income in the form of a compulsory purchase annuity, commonly known as a pension annuity.

You will need to buy a compulsory purchase annuity, or pension annuity, with the funds from any personal pensions, stakeholder pensions and money-purchase employer schemes. Those who belong to an employer’s final salary pension scheme will typically have their pension paid directly from the scheme and therefore will not have to think about annuities.

For some money purchase pensions schemes from employers, it may be the case that the pension trustees buy an annuity for you so it is worth finding out about your options from your scheme manager.

 

Buying an annuity?

 

When you buy an annuity, there is no going back so you have to be sure you are getting it right first time.

There are a variety of annuity types available, designed to fit with specific requirements and criteria and it is important you pick the right annuity for you. For example, if you are in a poor state of health, you may qualify for an “enhanced” or “impaired” annuity, a product which pays better rates because the providers expect to pay the annuity over a shorter period of time.

When buying an annuity, it is recommended that you take professional advice from a qualified annuities financial adviser in order to ensure you get the annuity that works best for you.

 
For many types of annuity product, such as the afore mentioned enhanced annuity, investment-linked annuities and phased retirement, professional financial advice is essential.