Types of Annuity

An annuity guarantees an income for life so for many people, even following the significant changes to pensions legislation which has given greater freedom and more options open to those about to retire, this will probably still be the best option available.

With many pensions however, their annuity does not have to come from the provider of the scheme that their pension contributions have been paid into. The first thing to consider is whether to exercise the open market option.

If another provider offers better annuity rates, thereby providing a higher pension, the fund can be transferred and the pension then starts immediately with the new company. Scouting around the market for good deals may affect income levels by as much as 30% to 40%.

Once a provider has been chosen, there are a number of ways the pension can be paid and any options taken up will affect the level of the pension and whether it continues to be paid to a spouse or estate after death. It is possible to opt for single or joint life annuities, guaranteed payment periods and fixed or escalating pensions.

Annuity rates applied to a pension fund to calculate the level of income are usually based on age and sex but could also be affected by factors such as state of health and sometimes lifestyle.

As annuity rates are very much based on life expectancy, if this is considered to be reduced in any way, this could work in favour of the annuitant – financially speaking. It is therefore always a good idea to give details of any medical conditions (such as diabetes or heart disease). These factors may then mean higher annuity rates could apply and therefore generate an enhanced pension (known as an impaired life annuity).

It is always a good idea to seek professional financial advice when planning to take retirement benefits as making the right decision will affect income for life and potentially that of any dependents left after death.

Our independent experts can help you to make the right decision and understand the implications of the recent changes to pensions. To talk to an adviser about your situation, please complete our Quick Enquiry Form on the right and we will arrange for you to be contacted.