See the top 10 Ranked Annuities
What is an Annuity?
An annuity is a way of converting a lump sum into an income that will last for the rest of your life and is purchased from an insurance company. Currently most people must purchase an annuity with their pension between the ages of 50 and 75. Generally 25% of the pension can be taken as a tax free cash lump sum and the remainder can be used to purchase an annuity to provide continuous income. There are times when buying a pension annuity is not a necessity but seek advice before going down this route as the fund needs to be a certain size to make this worthwhile.
A pension annuity is often purchased from the company that you built up the pension with although you can use the Open Market option to purchase an annuity from another provider. Shopping around the insurance company market will ensure that you find the best deals for your annuity.
Top Tips:
- If buying an annuity with a personal pension then there are a few things to check. a. Will there be a penalty if you buy your annuity from a different company to the one holding your pension. b. Does your pension fund offer a guaranteed annuity rate as part of your pension plan? If this is the case it could be that it is much higher than present annuity rates.
- Check if there are advantages to having larger sums of money in the annuity. It can be the case that by increasing the value of funds you have to purchase the annuity you can get much better rates.
- Check how often payments to you will be received. If you only purchase a low value annuity the income may not be given to you monthly.
- Do you have any health problems that will affect the rate you receive? People with a shorter life expectancy will tend to get higher annuity rates.
- Check the type of annuity that you are purchasing. Although some Level Annuities may look like they are going to be the best option the investor must consider the impact that inflation will have on this type of annuity as the income provided will never change. If inflation is going to be a problem then it may be better to look at Increasing Annuities, which fall into two categories, escalating and RPI-linked. This decision should be based on how long you believe you will live.
- Do you want a Guarantee period usually 5 or 10 years? This will reduce the amount you receive each year but means the annuity will be paid for the period of the guarantee even if you don’t survive.
- Once you purchase an annuity your fund is gone so don't accept the first offer, shop around. Current annuity rates are usually published in the newspapers.