Some things to think about. First, what is a pension annuity? Do you know, because it’s quite simple. You save a pension fund over the years you work, in a ”defined-contribution” pension plan, or personal pension, and you spend this on annual income for life when you come to retire.
How much annuity income you get depends on a large number of factors: the size of your pension fund, your age, any illnesses you might have, whether you’ve smoked regularly (or still smoke) or whether you are taking out a single or joint life policy, as well as interest rates, and the demand for gilts, or government bonds, and more. Whatever you get as an annuity income will be taxed every month, and it will be paid out until you die. Live a long and healthy life and you’re quids in: die a year later, however, and that saved money can just disappear into the pension company’s pockets.
There are different types of annuity and the monthly income will vary a great deal on, say, £100,000 saved in a pension fund. The major types of pension annuity are: a level annuity which gives a set sum from a life company paid out every month which will not change in size so can be eroded by inflation. Then we have percentage increasing annuities where your annuity will rise by a fixed percentage, say, 3% a year, for a set number of years. But you do have to pay for this guaranteed uplift and will get around 20% – 30% less a month at the outset.
Next there is an RPI-linked annuity which rises in line with inflation and protects you from losing your ongoing purchasing power. But you could end up with less if general prices begin to fall, as they have done only recently. A number of insurance companies, including Standard Life, have reduced payouts by 0.4% as deflation kicked in earlier this month.
Then we have the enhanced annuity, or impaired life annuity, which you could be eligible for if you’ve suffered a debilitating illness that might shorten your life, and the insurance company will usually raise the payouts to you in view of this. These increased annuity rates apply these days to mild or serious conditions, as well as to those who smoke regularly.
If married a joint life annuity could be appropriate. This passes on part of your defined-contribution pension income to a partner when you die and may be attractive but there is a penalty in that it produces a lower income. Using current pension annuity rates, a regular life annuity for a single 60-year-old bought with a pension pot of about £23,000 would pay out £1,000 a year in income. Opt instead for a 50% joint annuity, which pays out half the pension to a spouse or partner from the time you die until the time they do – that £1,000 would slip to £929 per year.
With all the above in mind you should really take the time to shop around for annuity quotes using the open-market option and find the best annuity rates for your circumstances. What you get for your pension money will also depend hugely on the life company (the annuity provider). According to a Financial Services Authority (FSA) annuity comparison tables shortlist in May this year, a £100,000 pension fund for a 65-year non-smoking retiree would provide £588 a month from Aegon for a basic level pension annuity but only £478 a month from AXA. Pick a 3% increasing annuity plan instead, and the incomes drop to £430 and £336 respectively. However, go for an RPI-linked annuity and your best deal is with Canada Life at only £384 a month; the worst is Scottish Widows, at a paltry £316 a month.
Plenty to consider. The most important thing is to do some research and get some advice. Getting the right annuity and the best annuity rates can make a huge difference to your retirement income.
