Annuity Features and How They Work
There are many aspects to an annuity which can affect the amount of money you will receive and the way it will behave. We will try to run you through the basics but for more info contact us anytime.
How do they work?
Your pension fund is exchanged for a guaranteed income for life. You are able to draw tax free cash first with the balance of the fund providing a guaranteed income for you and potentially your spouse or dependents.
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Types of annuity
There are several types of annuity here is a quick rundown.
These are the most common type of pension annuity sometimes referred to as compulsory purchase annuities. A lifetime annuity provides an income stream for the rest of your life or if you choose it for the life of your dependant as well. The annuity rate is the amount of income that you will be offered for each pound of your pension fund. The rate offered is based on the average life expectancy for someone your age plus a very small amount of interest.
This is the same as the lifetime annuity however the annuity provider has taken into account the retiree’s lifestyle. If you are a smoker or heavy drinker or just straight up heavy this can affect your life expectancy and the providers take this into account and give you a better price.
This is again an annuity for life but it is designed for retirees with a serious medical condition or a complicated medical history. These are not offered by as many providers and are often manually underwritten by a member of staff at the provider as opposed to generated by a computer.
Investment Linked Annuity
This is a type of lifetime annuity where part of the income is guaranteed and part is linked to investment performance. The chosen balance of the fund is invested and pays additional income based on the investment returns received. If your investments are going well you will receive more than normal but if your investments don’t pay off you will only get your chosen basic amount back.
Beyond the types of annuity mentioned above there are also options within those for you to select to create the correct product for you.
This ensures that the annuity is paid for a minimum number of years, normally 5 or 10 years. New rules from April 2015 mean that there will be no maximum, with some providers offering 30 year guarantee periods. If you opt for a 10 year guarantee and die after two years, there would be eight more years’ worth of payments. Selecting this option will slightly reduce the amount you are offered so it’s a balancing act to select the correct amount for your situation.
This is protecting your annuity against inflation, it goes up with inflation so the value of your pension doesn’t diminish too much over time. Again selecting this option will reduce the amount you are initially offered so it’s not a straight forward must have option that everyone takes.
How often you receive your annuity payments. Standard payment frequencies are monthly, quarterly (every 3 months), half-yearly (every 6 months) and annually (every 12 months). You can also select to have this “in advance” or “In arrears”.
To get more information about annuities, please continue to browse our advice centre.