Buying an Annuity

Buying an Annuity

With interest rates at levels not seen for many years, annuities rates have improved and there has been an increase in individuals choosing to secure a guaranteed income.

What is an Annuity?

An annuity is a contract with an Insurance Company to pay you a guaranteed income. The annuity provider will pay you a regular income which is subject to tax in the same way as earned income. The amount of income payable is dependent on your age and health, the size of your pension fund, economic factors and the type of annuity and the options you select. It is important to note that once you have purchased an annuity you cannot cash it in or amend your selected options. There are broadly two types:

Lifetime Annuity

A lifetime annuity pays a guaranteed income for your life, and potentially that of your spouse or partner, from the funds you have built up in your pension plan.

Fixed Term Annuity

A fixed term annuity pays a guaranteed income for a set period, after which it ceases. Typically, these products have terms of 5 to 20 years. Unlike a lifetime annuity, you and your spouse or partner may outlive the annuity payments, but these types of annuities can be useful in certain circumstances, for example, bridging the gap between retirement and State Pension Age.

Options

Both types of annuities offer a range of options that can be selected when the annuity is set up. These include:

• Single-life or joint-life – A single life annuity pays an income based on the life of the purchaser. A joint life annuity pays out until the spouse or partner of the annuitant dies. The purchaser decides at outset how much of their annuity is to continue for their spouse or partner following their death. Common options are 100%, 66% or 50%. The higher the level of spouse or partners pension included, the lower the starting income will be.
• Frequency of income – You may select at the outset how often you want to receive income each year. Most people choose monthly, but you can be paid quarterly, half-yearly or annually.
• Level or increasing – A level annuity pays the same amount of income year after year. It pays a higher income compared to the initial starting income available under an increasing annuity, which will take a number of years to catch up and exceed a level annuity. An increasing annuity, on the other hand, is designed to increase each year. The greater the level of increase chosen, the lower the initial income will be. It is possible to select a fixed rate of increase each year normally in the range of 3% to 8.5%. Alternatively, you can choose to link increases to reflect changes in the Retail Prices Index (RPI) or inflation capped at 2.5% known as Limited Price Indexation (LPI).
• A guarantee period – If you select a guarantee period and you die within the period chosen, payments will continue for the balance of time remaining. Normally the guarantee period will be either 5 or 10 years, but it is possible to have guarantee of up to 30 years. Remaining instalments would be paid as an income to the nominated beneficiary and would be tax free if you die before age 75 and subject to income tax at the beneficiary’s marginal rate(s) if you die after age 75. The longer the guarantee period, the more costly the option is.
• Annuity protection lump sum death benefit – This option allows for a return on death equal to the difference between the cost of annuity purchase and the gross income payments received. If you die before age 75 the payment to your beneficiaries will be tax free and if you die aged seventy-five or over it will be taxed at the beneficiary’s own income tax rate(s).

Health and Lifestyle Factors

Many annuity providers will consider the health and lifestyle of the purchaser and/or their spouse or partner when setting the level of income they will pay. It is therefore particularly important to provide full details of any medical conditions, medication being taken and information such as height and weight, smoker status and alcohol intake and we can provide a standard questionnaire to gather appropriate information.

If you are considering purchasing an annuity, please contact us and we would be very happy to provide you with a quotation and advice on the range of options available to you.