As you move into planning for your retirement, you may hear the words pension annuity.
In simple terms, a pension annuity is a financial insurance product that pays you a guaranteed income for a set period or the rest of your life. When you retire, you can choose to use some or all your pension pot to buy an annuity.
There are six leading annuity providers to choose from in the open market, all with a range of products to suit your requirements.
Your retirement income options
If you have a defined contribution pension, there are several choices you can make to take income when approaching retirement.
- Tax-free lump sum – If you haven’t already taken a 25% tax-free lump sum or only a lesser amount, you could boost your initial funds by taking your tax-free lump sum from your pension pot. Be aware though, taking money from your pension fund now, may have a significant impact on your income later in retirement.
- Purchase a pension annuity – You could decide to use all or part of your pension pot to buy an annuity, giving you a guaranteed income for a set period.
- Utilise pension drawdown – Not all providers allow pension drawdown. It’s essential to check with your provider or financial adviser to see if drawdown is permitted through your policy.
Different types of pension annuity.
If you’ve decided that a pension annuity could be for you, there are still a lot of things you need to consider before buying your pension annuity.
For example, you can choose between a lifetime annuity for a guaranteed income until you die, a lifetime annuity with a guaranteed fixed term or a fixed-term annuity, ensuring an income for an agreed period. When adding any guarantees into your annuity, the provider could reduce the amount of regular income you receive to cover these guarantees.
You could also fall into a category of an enhanced annuity. An enhanced annuity is where you will need to detail your lifestyle and health conditions. With this information, the annuity provider may offer you a higher income rate (hence enhanced) than against a standard annuity, due to the provider believing your life expectancy to be shorter.
Then there’s the option to buy an annuity that’s investment-linked if you’re willing to take some risk, and the decision on whether or not you want an escalating annuity, which goes up each year based on a fixed percentage or linked to inflation. All the above points are important factors to consider.
To give you the confidence you’re making the right decision an getting the best annuity for you, we would always recommend speaking with one of our experts.
How to buy a pension annuity?
As well as the type of annuity you choose, the annuity income you get can depend on things like your age, health and where you live. Generally, the older you are, or if you’re in poor health, the higher the income rates you’ll be offered.
It’s vital that when buying an annuity always to shop around. The pension provider that’s been managing your pension plan for years may not offer you the best annuity for your money.
People throw away £1 billion in retirement income because they didn’t shop around when buying an annuity.
You can compare pension annuity rates online, but speaking with an expert pension adviser could be beneficial. Once you’ve purchased your annuity, there is no going back, and you could be stuck in an annuity that doesn’t provide what you need. A regulated adviser will talk you through the options, listen to what you require and then put a retirement plan together that will include the right annuity product for you.
Annuities can be complicated
Buying an annuity can be a simple process, but getting the right product for you and your retirement could be a cumbersome and time-consuming process. Speaking with one of our pension experts could take-away the confusion. They will give you the confidence that you are making the right decisions to provide for you in retirement.
To find out more about pension annuities, click here or call our team on 0161 413 7051 today.