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Annuities – What’s It All About?

Trying to make your way through the world of annuities, is a daunting prospect and can be confusing, baffling and challenging.  Here Age Space Sussex’s Finance Partner, Kieron Robertson of Concierge Wealth Management, explains exactly what they are and why you may need them.

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Trying to make your way through the world of annuities, is a daunting prospect and can be confusing, baffling and challenging.  Here Age Space Sussex’s Finance Partner, Kieron Robertson of Concierge Wealth Management, explains exactly what they are and why you may need them.

In its basic form, an annuity is a financial product that bridges the gap between insurance and investment.  It does this by an exchange of cash.  For example, where you exchange a sum of money today (which could be from your savings, or retirement pot) for future periodic payments.

Overall, there are two main types of annuities, these are Deferred and Immediate. The difference is that with a Deferred Annuity your money is invested until you are ready to begin taking withdrawals, usually in retirement. With an Immediate Annuity, you will begin to receive payments soon after you make your initial investment.

There are a number of different Deferred and Immediate Annuities available and it is imperative when purchasing your annuity, you receive expert advice to ensure you buy the best one for you which includes all the right options for your personal circumstances.  These options include (but are not limited to):

  • Taking a tax-free cash lump sum known as a Pension Commencement Lump Sum (PCLS), with the remaining pension funds used to provide a reduced income in retirement.
  • Having a schedule of income payments which can be either monthly, quarterly, half-yearly or annually.
  • Having payments in advance. For example, receiving payments at the beginning of the agreed payment period or in arrears when they are paid at the end of the payment period.
  • Purchasing an Escalation Annuity, where the rate of increase of income payments per year counter the effects of inflation.
  • Taking a guarantee period which guarantees that your income payments will be made for a minimum period of time. The payment will continue even if you die soon after purchasing this type of annuity. However, the maximum guarantee period is 10 years.
  • A Joint Life Last Survivor Annuity offers a continued income for a nominated surviving dependant should the Annuity Holder pass away.
  • Payments With or Without Overlap. With the ‘With Overlap’ option, you will need to select a guaranteed period and a continued income to a dependant and, if the Annuity Holder dies within the guarantee period, both the remaining payments and the dependant’s income payments will be paid. However, if you select the ‘Without Overlap’ option, the dependant’s income will not start until the remaining income payments over the guarantee period have been completed.
  • Payments With or Without Proportion. If you decide to take the ‘With Proportion’ choice, and you unfortunately die, a proportion of the next due income payment is paid based on the number of days since the last income payment and the date of your death.

Some options may affect the starting amount of income that the chosen annuity will provide but some, such as the Escalation or Joint Life annuities, may mean that more income is paid out over the lifetime of the annuity depending on certain aspects such as, how long you and/or your nominated dependant live.

Conversely, your health is another important consideration when choosing the correct annuity and, in some instances, can mean additional income being paid when compared to a standard annuity.

Annuities can be an attractive choice to some investors, as they offer a predetermined income for life.

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Of course, there are Pros and Cons of Annuities.  They could be right for you if:

  • You want a secure, guaranteed income for the rest of your life.
  • You do not want your retirement income to be exposed to Stock Market fluctuations.
  • You’d like your retirement income to be able to rise with inflation.

But, an annuity may not be the right product for you if:

  • You have, unfortunately, a short life expectancy.
  • You want flexibility or the ability to stop, start or alter your income. This is an important factor to consider as, in most cases, once your annuity has been set-up, it cannot be amended.
  • You have other income sources and do not require additional (guaranteed) income.
  • You want to keep your invested Retirement pot to pass on to your loved ones.
  • You are unsure of taking any chances with the Annuity Rate at the time you purchase one.

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As with every financial decision, it is important to get professional advice on the best options for your individual circumstances and take into consideration such things as whether you want protection against inflation, how much risk you’re prepared to take, whether anyone else is dependent on you for income, how much control you want over your investments and whether you want to provide an inheritance for your survivors.

The above is not meant to constitute investment advice and it should not be relied upon as such, it is purely providing a general overview of the topic.

If you’d like any more financial help or advice, please contact Kieron at Concierge Wealth Management via email: kr@conciergewealth.co.uk or telephone 07840 245 968, or visit www.conciergewealth.co.uk