Choosing a Lifetime Annuity
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There are several things to think about to ensure you get the right pension income for you.
Here we cover the following:
- What is a lifetime annuity?
- Who can buy one?
- Why is it important when you take your annuity?
- How your pension income is worked out?
- Choosing the right type of annuity.
- Shopping around for the best deal
We also cover some other retirement options that you can take.
Why is it important when you take your annuity?
If you have a with-profits pension fund you are asked to state an age at which you would like to retire. Usually people choose age 60 or 65. This age will appear on your pension policy documents as your expected retirement date.
With-profits funds will usually only allow retirement benefits to be taken at set dates in the life of the policy, such as your selected retirement date. Some insurance companies may reduce your fund at retirement by making a market value reduction or other charge if you don’t buy an annuity on this date. Make sure you check what date you have said you want to retire at and whether you will be penalised if you don’t take your annuity then.
How your pension income is worked out
The amount of pension income you will get depends on several factors, such as:
- the amount of money left in your fund if you choose to take a taxfree lump sum;
- the annuity rate offered by the insurance company;
- the type of annuity you decide to buy;
- your sex (women will get a lower income because they are expected to live longer);
- your age (you will get a lower income the younger you are); and
- your health or lifestyle (you may get a higher income if you are a smoker, have high cholesterol or are in poor health. Where you live or your occupation can also make a difference)
Shopping around for the best deal
Your pension provider should give you an estimate of the value of your fund at least six weeks before you plan to retire They should also tell you how much income the lifetime annuity they offer would give you.
You don’t have to buy your annuity from your pension provider. You can shop around. This is known as an open market option.
However, always check what your provider is offering you first, as they may offer a guaranteed annuity rate written into the policy which may be higher than the rates offered in the open market.
Lifetime annuity quotes are usually fixed for between 7 and 28 days. The company will tell you if you have the right to change your mind and cancel the contract, and if so, how to cancel.
Not all companies will deal with you direct so it may be advisable to consult a whole-of-market adviser, who should be able to look at all the annuity rates on offer.
The insurance company usually pays commission to the adviser, so getting advice should not affect the amount you pay for the annuity. But ask whether you have to pay the adviser any added charges.
Occupational defined contribution schemes
The rules for these schemes are different to those for personal pensions and stakeholder pensions. The trustees of the scheme may buy an annuity for you, but you do have the right to shop around if you want.
What is a lifetime annuity?
A lifetime annuity converts your pension fund into pension income and will be paid to you for the rest of your life.
Your pension income is subject to tax, just like your normal salary.
Who can buy one?
You can buy a lifetime annuity if you have one of the following types of pension:
- Personal pension
- Stakeholder pension
- Most Additional Voluntary Contribution (AVC) schemes
- Free-Standing Additional Voluntary Contribution (FSAVC) scheme
- Retirement annuity contract (RAC)
- Section 32 policy (buy-out bond)
- Occupational money purchase scheme
If you have contracted out of the additional State Pension, you must use that part of your pension fund to buy a protected rights annuity. You have the same options as with your other pension funds except that you must buy a joint-life annuity paying a 50% spouse’s pension if you are married or have a civil partner.
Key points
Taking a tax-free lump sum is attractive, but it does reduce your pension income.
- Find out whether you’ll be penalised if you don’t buy an annuity at your stated retirement age.
- Check whether you could get a better income because of your health, lifestyle, occupation or where you live
- Consider whether you need to provide a pension for your partner on your death.
- Consider whether you want your pension income to keep pace with inflation.
- Think very carefully about the type of annuity you want, as you can’t change your mind once you,ve bought it.