Frequently Asked Questions About Annuities
Why Don’t We Show Annuity Rates?
The Argument Against Annuity Rate Tables and Calculators
You may have already visited other annuity sites and used an annuity rates calculator or checked an annuity table.
Unfortunately, they tend to raise more questions than answers.
- Were you sure that the annuity rates displayed were up to date?
- Did you know that annuity brokers may have access to a broader range of retirement income possibilities?
- Did the site promote particular companies over others as they were paid higher commissions by certain providers?
- Were companies able to pay to list their particular products higher in the tables, or even have their products shown in a different, maybe more prominent way?
- Was it an individual quotation based on you personally or just a generic illustration?
- Were you aware that annuity rates may change before your application actually goes through or, if you received a quotation, was it guaranteed?
But what if the site tells you that all its information and rates are up to date?
Even if the tables were 100% up to date and correct, were you aware that the figures may have no resemblance to the pension income that you will actually achieve?
This is because your annuity may increase due to circumstances as yet unknown to the website, i.e. your state of health, whether you smoke or not and any medication you may take.
Some annuity providers even base your future pension income on your previous occupation, for example especially in the case of some manual workers, or where you live (based on postcode).
So, let us say that you do find a comparison table where everything works correctly and is up to date; do you know at this stage whether you want a fixed-rate escalating, an rpi-linked escalating or level annuity?
Also, have you considered your spouse, partner or dependant’s percentage when you die? Or have you thought about capped drawdown?
There are a wide range of retirement income choices.
What is an Annuity?
An annuity is an arrangement where a investment is made from a lump-sum and from this you will receive a guaranteed level of income until you die. Most annuities are bought using pension funds held in money purchase pension schemes or personal pensions.
Although an annuity is payable for the rest of your life after purchase, if purchasing an annuity with cash as opposed to pension funds, it’s possible to select a fixed period of time.
Examples of this type of “Compulsory Purchase Annuity” are standard annuities, with profit annuities and unit linked, or third way annuities.
Annuities which are purchased from savings, i.e. not from pension schemes, are often called “Immediate Vesting Annuities” or “Purchased Life Annuities”.
Retirees are normally entitled to take up to 25 per cent tax free cash from their pension fund.
You can purchase an annuity if you have one of the following pension types:
- A Personal Pension
- A Stakeholder Pension
- Free Standing Additional Voluntary Contribution Schemes (FSAVCs)
- Most Additional Voluntary Contribution Schemes (AVCs)
- Retirement Annuity Contract (RAC)
- Occupational Money Purchase Schemes
- Section 32 Policy (Buyout Bond)
What Are Enhanced Annuities?
If you are in advanced years, are in/have been in poor health or a smoker, then you may be able to increase your annuity income.
Some annuities, called “Enhanced Annuities” or “Impaired Annuities”, pay more than a basic annuity as someone in better health tends to live longer than the average person.
Therefore, the annuity providers often pay out more over the healthier person’s retirement life so annual income is usually lower. That’s why it is extremely important to report any medical condition, no matter how small you think it is, to your annuity broker. It may result in a much higher rate.
You may regard yourself as relatively healthy and therefore ineligible for an enhanced annuity, but the reality is often different.
Some believe they have to suffer from a serious medical condition such as a stroke, heart disease or cancer to receive increased income in retirement, but this is not always the case. A seemingly small complaint or condition may increase your retirement income.
In fact, if you suffer from one of nearly 1500 ailments, such as a digestive complaint, being overweight, high cholesterol, asthma, diabetes, high blood pressure, heart problems etc., you must ensure you mention it to your annuity broker.
Additionally, higher incomes are often achieved by:
- People who have retired from certain occupations, especially manual workers
- Daily smokers of 10 or more manufactured cigarettes
- Those who live in certain areas of the UK
According to The Money Advice Service, up to 40% of the British population could boost their pension income with an enhanced annuity. Source.
If you believe that you fit this category, it’s crucial that you tell our team of annuity specialists about it. You will stand a much better chance of a higher income for the remainder of your life.
What if I’m a Smoker?
If you smoke 10 or more manufactured cigarettes, annuity providers factor in that you are likely to die sooner than the average person that does not smoke. Therefore, they assume that they will not be paying you your pension income for as long a period. A presumed shorter life means that being a smoker can increase the amount of income you will receive from your annuity.
So, as a smoker, you may already be eligible to receive a higher income, but also, depending on your age, you may receive further enhanced rates of up to 40 percent above the standard level annuity rates.
What Types of Annuities Are Available
There are a wide range of options available. The most widely used types are:
Your annuity income is guaranteed to be paid for the remainder of your life, but it can also be modified to include any of the following options:
- Five year guarantee – The annuity ceases when you die, or after five years, whichever is longer
- Ten year guarantee – The annuity ceases when you die, or after ten years, whichever is longer
- Joint life annuity – The annuity ceases on the death of the 2nd of 2 named annuity holders
Your partner, spouse or dependant(s) can be protected following your death by choosing one of the following:
- Reduction to half benefit
- Reduction to 2 thirds benefit or
- Full benefit
The annuity is adjusted to the new level after you die or, if selected, at the end of the guarantee period. It continues until the death of your spouse, partner or dependant(s).
An annuity can either be paid at a fixed level for the rest of your life or can include an escalation at three per cent, five per cent, or at the RPI percentage (the annual increase in the Retail Price Index). You can therefore choose to compensate for any inflationary effects that may happen to your income. But bear in mind that if you do choose escalation, your initial income level will be reduced.
What’s a Purchased Life Annuity?
A purchased life annuity is an annuity bought with your own savings as opposed to from a money-purchase pension fund. It operates in a similar way to a compulsory purchase annuity, but it does have tax advantages.
The entire pension that you would receive from a compulsory purchase annuity would be treated as taxable income in much the same way as income from employment. However, when you buy a purchased life annuity, that part of the income, which is calculated as capital repayment to you, is free of tax. Only that part of your income that is interest paid on the investment is taxable.
With similar annuity rates, the effect of this tax treatment of a purchased life annuity, for a basic rate tax payer from a £200000 investment, could increase their net income by approximately £200 a month based on 2012/13 tax rates.
Which Companies Provides Annuities
Annuities providers are usually life insurance companies. You will receive competitive annuity comparisons selected from major providers such as:
Aegon, Aviva, Canada Life, Friends Life,Hodge Lifetime, Just Retirement, Legal & General, LV =, MGM Advantage Partnership, Phoenix, Prudential, Reliance Mutual, Standard Life and Zurich. As well as specialist companies who can help specialist circumstances.
What is The Open Market Option?
The Open Market Option allows you to shop around for the different ways to convert your pension funds into an annuity. You do not have to accept the rate originally offered by your pension provider. You could actually receive much more pension income from a annuity than you think.
When your pension fund reaches its maturity, your pension provider(s) advises you of the fund value and should also give you general information about annuities and your expected level of pension income.
You are then entitled to use your Open Market Option which allows you to transfer the pension fund money to another annuity provider. This enables you to take advantage of a possible higher pension income which may be available from the different provider.