FAQs
When you buy an annuity you’re arranging your retirement income, and you have various options to consider. Here we answer some of the more common queries.
What is an annuity?
An annuity is a regular payment of income throughout the life of the recipient (the annuitant) in exchange for a lump sum, usually a pension fund.
Do I have to buy an annuity?
No, there are alternative retirement options available to access your pension which may or may not be suitable. Since legislation changed in April 2011, you can delay the purchase of an annuity indefinitely, although there are various reasons for and against this course of action. It is best to speak to an adviser if you are unsure.
Do I have to take my annuity from my pension provider?
No. You have the right to ‘shop around’ and use your open market option to get a better deal elsewhere from a different company. You could get significantly more income by shopping around.
Can I get a higher income if I smoke or have health problems?
Most people can obtain a higher income for life if they smoke or have health conditions with an enhanced annuity. Even minor ailments such as high blood pressure or cholesterol can lead to a substantial increase in the income payable.
Do I have to take my tax-free cash?
No, but again, there are reasons for and against taking the tax-free cash lump sum. For most people it is sensible to take the lump sum as it is tax-free and provides some flexibility. You can normally take up to 25% of the value of your pension fund as tax-free cash. The more tax-free cash that is taken, the less there is to buy a retirement income with.
Are there different types of annuities?
Yes there are. The main types of annuity are conventional annuities, investment linked annuities and fixed term annuities. Further information can be found by clicking on the appropriate link.
Can I include my spouse or my civil partner in my annuity?
Yes, you may if you wish, elect to provide your spouse/dependant or civil partner with an income after you die, up to 100% of your income, with a joint life annuity. If you choose to do so, your own income may be reduced. If your fund contains Protected Rights, you must provide a 50% spouse’s pension if you are married.
Can I choose how to take my annuity income? Does it have to be level?
You have the option to choose how your income is paid. You may choose to have a ‘level’ pension that does not increase, or instead have a lower starting income that increases over time, either by a fixed percentage or in line with inflation. As you can only make this decision once, it is important you speak to an adviser to fully understand all of your options.
Are there differences between annuity providers?
There can be a wide variation in the amount of retirement income annuity providers (insurance companies) will offer you, depending on your circumstances. There are only a few annuity providers that offer competitive terms, so it is essential you shop around to ensure you receive the highest income possible. Some annuity providers specialise in offering enhanced annuity rates – a higher retirement income – if you smoke or have health problems.
How long does it take to set up an annuity?
It takes around six to eight weeks to set up your annuity, but it could considerably more or less, depending on the efficiency of your current pension provider in transferring your pension fund monies to your newly selected annuity provider.
Are annuity rates guaranteed?
We’ll try to ensure you get the same annuity rate as when you received your annuity quote, however, annuity rates do vary over time. Most annuity quotes are guaranteed for at least 14 days, although this varies between insurers. Some quotes are valid for up to 45 days. If the funds are not transferred over from your current pension provider to your newly selected annuity provider in time and the annuity rates change, then your annuity payments will also change.
It is therefore important when you have made up your mind that you try to return to us the appropriate application forms and other documentation as soon as possible after receiving them.
Does where I live make a difference?
Where you live can make a difference to the annuity rates offered to you because of what is now known as postcode annuities, or postcode rated annuities. Basically, people living in traditionally less well off areas aren’t expected to live as long as people living in more affluent areas and therefore an insurance company will offer higher annuity rates to the former because they don’t anticipate making payments for quite so long.
What is income drawdown?
Income drawdown is an alternative to buying an annuity whereby you draw an income from your pension fund, whilst the remainder of the fund is still invested. This is the most flexible way of arranging your retirement income and also provides greater death benefits. It is more complex than an annuity and it is important to seek advice.
What is flexible drawdown and capped drawdown?
For individuals who have a guaranteed pension income of at least £20,000 pa, they are able to draw unlimited amounts of income from their pension fund, subject to income tax. For those that do not yet have a secure pension income of £20,000, the amount they can draw is limited to 100% of a rate specified by the Government’s Actuarial Department (GAD). This rate is based on a single life, level standard annuity and the current Gilt Yield.
Can I change my mind and move my money after I’ve bought an annuity?
Once you have purchased your annuity you cannot normally make any changes. That is why it is important you take the time to get your selection right in the first place with the right annuity and the right options.
What happens if I die after I buy my annuity?
If you die after buying an annuity then typically there will be no further annuity payments or lump sum paid over to a beneficiary. However, when purchasing an annuity you can select certain options to ensure that money is payable on your death, for example, a joint life annuity or a guarantee period.
