What are annuities?
An annuity pays a guaranteed regular income to you for the rest of your life. Most people at retirement will use the money accumulated in pension funds during their working life to buy an annuity.
When you reach retirement there are two main ways in which you can receive an income from your pension fund:
- Purchase an annuity which will provide a guaranteed regular income for the rest of your life
- Take an “unsecured pension” which allows you to draw an income from your pension whilst leaving it invested in shares, funds or other assets. This leaves you in control of your pension investments.
However, once you reach the age of 75, you must normally use your pension fund to buy an annuity, even if you opted not to take one immediately or invested in an unsecured pension to start with.
So why do you need to research? When you reach retirement age your pension company will more often than not write to you and offer an annuity and a deadline to decline the offer. This will include various options such as indexation, single or joint life, guarantees etc. Most people who do not fully understand the options available to them will tick the box that has the highest starting income and purchase an annuity which once purchased cannot be changed.
What you might not know? Your pension company probably won’t tell you this but, when the time comes to purchase an annuity you can approach other providers and request quotations to see if you can get a better deal. This is called an Open Market Option. Some providers will also take your health into consideration and often smokers will benefit from better annuity rates. You could also take a joint life annuity that will provide some income for your spouse or partner in the event of your death. Rates for these annuities will be slightly less at outset, but will offer income support for your spouse or partner after your death.
Everyone’s circumstances are different and before you make any decision that will affect the amount of money you receive in retirement, or a decision that will compromise the flexibility of your retirement, we would encourage you to seek advice from our pension specialist or your financial adviser.