Historically, an annuity was bought at the point of retirement with a lump sum saved into a defined contribution pension. Bought from an insurance company, an annuity provides a guaranteed annual retirement income for life in exchange for all or some of the pension pot that has been accrued. Whilst annuities are no longer obligatory for someone with a defined contribution pension (as of 2015) they are still considered by many to be the best option for regular retirement income. Those on final salary pensions do not need to buy an annuity and the state pension is not included in the calculations for anyone.
There are 3 types of annuities:
Standard annuity – available to anyone but the amount received will be dependent upon age, the current price of Government bonds, health and lifestyle and postcode;
Enhanced annuity – In most situations, poor health or a lifestyle that could reduce your life expectancy isn’t considered beneficial, but when it comes to your pension annuity these things may secure an enhanced annuity and therefore a higher retirement income. This is because the annuity may not have to cover as many years.
Immediate Needs Annuity – a particular type of policy that provides a regular income in exchange for an upfront lump sum investment, designed to cover the shortfall between income and care plan costs, for the rest of your parents’ lives. This is only suitable for those receiving care.
Key Considerations about annuities
• Not everyone gets the same deal.
• Rates vary between providers and the time at which an annuity is bought.
• Longevity is an important factor – the longer you live the lower the payments
• Value for money is a big question – the profit margins on some annuity products can be as high as 18%.
There are other considerations such as once an annuity has been bought it can’t be traded or swapped for another product, so seeking advice is highly recommended. There is lots of useful information available, including: https://www.moneyadviceservice.org.uk/en/search?query=annuities