The Annuity Hub - All you need to know about annuities

What is an annuity?

You can use your pension fund to buy an income that is guaranteed for the rest of your life. An annuity offers a number of options including the ability to pay out to anybody you choose after you die. This means you get the best value from your pension fund and always ensure more is paid out than your purchase price.

Your health and lifestyle (e.g. smoking, drinking etc.) can have an impact by increasing the income you receive through an enhanced or impaired annuity.

There is currently a proposal to enable annuitants to sell their annuities for cash. This is being proposed as becoming available from April 2017.

Benefits and drawbacks

Below are the positive and negative aspects of an annuity. If you need flexibility then this is potentially not the product for you.

Major benefits:

  • guaranteed fixed income
  • enhanced income with ill health or medical consideration
  • improved options for beneficiaries

Potential drawbacks:

  • lack of future flexibility
  • lower income level than required

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Next steps

  1. Take our full retirement journey and submit an initial enquiry at the end of the journey.

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  2. Contact us on 02920 451311 to talk through your options. We have a copy of your retirement report so will be able to answer any questions and help implement your retirement decisions.

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  3. Should you feel uncertain about your retirement options and need advice about your existing pensions, please contact us on 02920 451311 and we will help you step by step to ensure you get the most suitable advice for you and your family.

Annuity options

The following popular features are available with annuities:

Single or joint life annuity

A single life annuity is one set up with you as the only annuitant. Income payments cease on your death unless you have selected a guarantee period. If you choose a joint life annuity, the payment will continue to your selected dependent at a percentage of your income level.

Payment frequency

Most annuity providers will permit payments on a monthly, quarterly, half yearly or yearly basis. The payment can be commenced either in arrears or in advance.

Escalation

Income payments increase each year by your specified percentage. The most common is on a level basis which ensures the highest possible income starting level. Fixed escalation allows you to specify a percentage usually up to 5% per year. Your starting income is reduced to pay for this benefit. Alternatively, you can select for the income payments to increase in line with inflation – either the Retail Prices Index (RPI) or the Consumer Prices Index (CPI). Again, a reduced starting income is offered to cover the cost of this benefit.

Guarantee period

An option to ensure that a minimum number of years' payments are made by your annuity, even if you die. The maximum guarantee period is 30 years. If you die during the guarantee period, the annuity will continue to make income payments until the end of the selected guarantee period or you could select that the remaining payments are paid as a lump sum.

Enhanced annuities

An enhanced annuity pays you a higher retirement income than a standard annuity because of your health and lifestyle. It's estimated 60%+ of the UK population could qualify for an enhanced annuity at retirement.

The enhanced annuity provider work on the basis that you have a shorter life expectancy based on your medical disclosure or lifestyle which results in a higher income.

Some of the common conditions that increase your income levels via an enhanced annuity:

  • Smoking or drinking
  • Obesity
  • Diabetes
  • High blood pressure or cholesterol
  • Cancer (historic or present)
  • Heart disease
  • Any genetic or hereditary conditions

To qualify for an enhanced annuity, you will need to be assessed by the annuity provider. You can do this by using our online retirement system. This will provide instance figures from the enhanced annuity providers on your enhanced income.

For a more accurate and detailed quote, please complete the “common quotation form”. This enables the enhanced annuity providers to underwrite your health and lifestyle and offer the highest possible income. Any enhanced annuity requires advice. This is something the enhanced annuity provider requires. If you are eligible for an enhanced annuity we can guarantee you will receive more income than your current scheme even when any advice costs are included. If this cannot be secured, we will put your current pension annuity offer in place for free.

Tax implications

Tax can be complex and depending on your retirement options and overall income you could be taxed in a number of ways. Typically you will be able to withdraw 25% of the fund as a tax free lump sum, with any further withdrawal being classed as taxable income on top of any other earnings during that financial year.

Please feel free to contact us on 02920 451311 to discuss your tax position in more detail.

What happens when you die?

If you die before you take anything from your pension:

  • If you die before age 75 – your pension can be paid to your beneficiaries tax-free (as long as it is less than the lifetime allowance: £1.25million in tax year 2015/16, £1 million is 2016/17), either as a lump sum, an annuity, or through flexible drawdown.
  • If you die age 75 or older – your pension can be paid as a lump sum which will initially be taxed at 45%, or your beneficiaries can use flexi access drawdown and will then only pay tax at their marginal rate.
  • There will normally be no inheritance tax to pay.

If you have taken money from your pension pot to buy an annuity

  • If you chose a guaranteed period and die within this period, the annuity will continue to be paid until the end of the guaranteed period.
  • If you bought a joint life annuity the annuity payments will continue to be paid to the chosen beneficiary, at the level you chose, until they die. If you die before age 75 the annuity payments paid will be tax-free, if you die after age 75 then any payments will be taxed as income at their marginal rate.
  • In all other cases your money dies with you so no further payments are made.

More information is available on the HMRC website.

Case studies

Above are some video case studies featuring real people speaking about their retirement plans, and what they do and don’t understand about the complexities of their situations. It’s plain to see why some might have benefited from some expert financial advice.
Videos provided by oldmutualwealth.co.uk