Retirement Annuities

Retirement Annuities Buying Guide

Simply waiting for retirement age and then drawing down your pension is not the most effective way of creating a retirement income for yourself. By purchasing an annuity you can turn all the pension savings you have accrued into an income that will last the rest of your life.

It has been found that by buying annuities you can improve your retirement income by up to 40%. You can ensure you have a guaranteed monthly income that is in line with your standard of living for your retirement.

What exactly is an annuity?

An annuity is a financial product where you pay a lump sum into and in exchange you will receive a regular monthly income. It works in that when you pay contributions into a private pension scheme and retire, you can take up to 25% of your savings from your pension scheme as a tax free lump sum. Most people will invest the remaining amount into an annuity of some type. When you purchase this annuity each person will get their own personal rate which is determined by how much money you have contributed to your pension so far. Factors such as the area you live in, your health and the provider you choose will also determine the rate you get.

Here is an example of what you might expect to receive. If you had a pension pot of £200,000 and you got offered an annuity rate of 6% then you would receive £12,000 a year.

To make things very simple, an annuity will convert your pensions savings into an income for the rest of your retirement years.

Types of annuities

There are eight different types of annuity available on the market currently:

Level annuities - This is the most common annuity and it works in that it pays out a flat amount of income each year for the rest of your life. At the start of this annuity you will ge the best rate possible which is an obvious advantage. You will need to consider though, as a disadvantage, that over time the rate of inflation will eat into this rate thus meaning you your standard of living will take a hit.

Escalating annuities - These are popular in that they pay out an increased amount year after year. This increase is normally in line with inflation which is usually the RPI or Retail Price Index. The real advantage of this type of annuity is that they protect your income from inflation. The disadvantage is that they are rather expensive, you can expect to be paid around half of the level of income that you would get from a level annuity when you first buy one.

Single life annuities - Also very popular these type of annuities release income to just you. Whilst they are very popular they will cause you problems should your partner outlive you.

Joint life annuities - As do single life annuities, these type of annuities pay you an income but they will also pay an income to your partner or spouse after you die. You have the control over this in that you can set the amount of income that is paid after you die.

Investment linked annuities - These type of annuities are more risky in that they are linked to the stock market. So the amount of income you are paid is very much dependent on how successful the underlying investments are.

Variable or flexible annuities - These annuities will increase and decrease in line with investments they are linked to. They do, unlike investment linked annuities, have a guaranteed minimum amount of income paid to you. They are very complicated products and are not suitable for everybody.

Fixed term annuities - Like a standard annuity a fixed term annuity will pay a set amount out each year, however after a certain period they will stop. This period is normally around 5 or 10 years and when they mature they pay out a capital lump sum. You can then use this money to reinvest in another annuity or financial product.

Enhanced annuities - The standard annuity you find on the market is linked to the average life expectancy of a human. The problem with this is that not everyone lives to average life expectancy age (currently 83.2 for men and 85.8 for women). Some providers offer these type of clients an enhanced annuity which would normally cover people with poor health or other factors that mean they may die earlier.

Buying an annuity

Shop around and do your research! There are lots of companies on the market all competing for your money and it is important that you do your best to get the very best deal for you.