How to unravel that annuity in these uncertain times
An excellent article appeared in The Sunday Times, 26th October, and on Times online, about various types of annuity. These made good reading, but it was the case study it gave which was more interesting. The one thing it certainly did do was to highlight the benefits of taking advice.
The article covered the following types of annuity:
TRADITIONAL LIFETIME ANNUITY. This is commonly the most straightforward annuity providing a guaranteed income. It is the one bought most.
ENHANCED ANNUITY. Increased annuity rates apply to those with lifestyle or medical conditions, and to those who smoke regularly.
IMPAIRED LIFE ANNUITY. These are available to those with serious medical conditions and who are likely to live less than five years, as well as those with more common conditions, such as certain types of diabetes, high blood pressure and high cholesterol.
FIXED TERM ANNUITY. The income is paid for a specified term (usually at least five years) after which you receive a guaranteed maturity amount (GMA), also fixed at the outset. This must be used to buy another retirement income plan. (See the example below.)
INCOME DRAWDOWN. With these contracts you can draw down an income and leave the rest of your fund invested. The income is between nil and 120% of what a traditional annuity would pay.
WITH PROFITS ANNUITY. These are linked to an insurer’s with-profits fund, and aim to smooth returns by holding back some in good years to pay out in the bad. Income varies with in line with bonuses attaching to the policy. At the outset, you select an anticipated bonus rate of nil to 5%. If it turns out to be higher, your income will rise, and vice versa. Warning: some insurers have been paying as little as 2%.
UNIT-LINKED ANNUITY. No smoothing process and income is directly linked to investment performance. You could opt for a medium or high-risk managed fund or a tracker.
VARIABLE ANNUITIES. Known also as “third way” pensions, aim to give the best of traditional annuities (guaranteed income) and income drawdown (potential investment growth).
PHASED RETIREMENT. Here you spread the annuity purchase over several years, instead of only buying one at the outset.
SECURE A BETTER DEAL. Shop around for that annuity, and be prepared to take advice.
THE EXAMPLE. Mrs. R., a council worker, wants income security, while keeping her options open. She decided to buy a fixed- term annuity when she reached 60 last month. She bought a Living Time annuity with her £117,000 pension pot. The plan will pay out £7,400 a year for five years and then return £108,500 to buy a new pension income plan.
As Mrs. R. said: ‘When it comes to money, it is better to play safe.’
Tags: enhanced annuity, variable annuity, with profits annuity
