A pension annuity and other options
Choosing what to do at retirement, buying that pension annuity, choosing the right options, is one of the most important decisions you’ll ever make. Make the wrong move, buy the wrong pension annuity and the wrong options, and you could be tens of thousands of pounds worse off. Yet millions fail to shop around for the best deal. Most people use their pension savings at retirement to buy an annuity. But these do come in all shapes and sizes:
Level Annuity (single life). The vast majority of people prefer the security of an annuity which pays a guaranteed income for life. Current rules mean most people with personal pension savings have to buy one by the time they reach 75. The most popular option is a level annuity which pays a fixed income. There is a massive difference between the best and the worst rates. A £50,000 pension pot will give a single man aged 65 income of £3,903 per year from Aegon - which has the best rates at the moment. You’ll get just £3,219 a year from Axa, which pays one of the worst incomes. If you want to guarantee the payment for five years, you’ll get £3,878 from Aegon at age 65.
Level annuity (joint life). You can ensure some or all of the money passes to your spouse if you die by buying a joint life annuity. The trade-off is you get a slightly lower income from the start. Aegon currently has the best deal, at £3,585 for a £50,000 investment.
Enhanced/Impaired. If you have certain medical conditions or are a smoker, you could qualify for a better pension in the form of an enhanced - or impaired - annuity. These boost your retirement income - basically because your reduced life expectancy means your pension pot is spread over fewer years.
Inflation-linked annuities. Similar to level annuities, but your income grows in line with inflation - the Retail Prices Index.
There are are other options if you’re prepared to take more risk and have a bigger pension pot. These include with-profits annuities and variable annuities - both of which are linked to the stock market. These can pay a higher income, but can also give out less if the stock market falls. You should watch out for higher charges, particularly with variable annuities. These pay you a percentage of the value of your fund as income - typically 5%.
