An annuity is a product offered by insurance companies and it works like this: You give the insurance company the balance of your pension savings, after you’ve taken any tax- free cash. In return, the insurance company will pay you an income every year for the rest of your life, however long you live.
Few people have any idea how long they are likely to live. Knowing that an income will be paid however long you live is very reassuring. This is where annuities can help.
If you’re interested in buying an annuity, the first point to remember is that you don’t have to accept an annuity offered by the company you’ve saved with. In fact not all companies that you save with offer an annuity product. Everyone has the right to shop around at retirement for the best deal.
What do I have to do?
If you are thinking of choosing an annuity to provide your income in retirement, there are three decisions to make:
Remember: you have the flexibility to choose an annuity and income drawdown, if you want to you can do both.
Step 1 - Understand the different types of annuities
A Lifetime annuity pays a guaranteed income for life that can never fall below the amount payable initially. In other words, you will receive the same income for the rest of your life. You can also arrange for your income to increase each year.
These products will often pay a higher income if you are a smoker or overweight.
Impaired life annuities
Step 2 - Identify the options that are right for you
There are a few decisions you have to make, but these are relatively straightforward.
Let’s start by identifying the areas you need to consider. These are:
- Spouse’s pension. Do you want part or all of your annuity payments to continue to be paid to your spouse or partner after you die? If you don’t want this option, then you should opt for a ‘single life’ annuity.
- Death benefits. For example, would you like to guarantee that your annuity payments will be made for a minimum number of years if you die early?
- Fixed or increasing income. How important is it that your annuity payments increase each year to offset inflation?
Step 3 - Get advice and shop around
It’s your right to shop around and you’ll usually get a higher retirement income. It can help to speak to an independent financial adviser.
A recent survey showed that 8 out of 10 people who stayed with their existing provider lost out by not switching.
You don’t have to take out an annuity when you retire. There are now other options, see What's Changed?
Source: Financial Conduct Authority, Thematic Review of Annuities, Feb 2014