A Guide to Annuities

Before deciding what you want to do with your pension fund, it’s always wise to research the most current information available. Here’s your guide to annuities.

Speaking to a qualified and experienced financial services expert about your retirement funds will put you in control of your retirement savings. Always choose a financial adviser that is authorised and regulated by the Financial Conduct Authority (FCA).

Annuities

Annuities can be bought from an insurance provider using all or some of your pension fund. It’s a way of ensuring a set and regular income is paid to you for the rest of your life.

When you buy an annuity, you can pay yourself up to 25% of your total pension fund amount up front, as a tax-free cash lump sum. The remaining capital element of your fund pays for the annuity which is invested by your annuity provider.

It’s important to be as tax efficient as possible so you can enjoy the maximum return of capital. You‘ll pay income tax on your annuity income payments when, or if, they exceed the annual personal tax allowance. Annuity payments are taxed at source under the PAYE system. When you provide a P45, the annuity will be paid net of your marginal rate of tax and there will be no further tax liability.

Make sure your annuity offer doesn’t sound too good to be true, as providers differ in what they offer. You may earn back less than you paid in if you die sooner than you expect to, so make sure the type of annuity you buy can be left to a beneficiary.

Also, be certain a pension annuity is what you need before signing on the dotted line. You cannot back out once the decision has been made, so expert independent advice is essential.
Alternative types of annuities

There are alternative types of annuities which can benefit you in different ways and one of our advisers can recommend which is right for you:

Purchased life annuity

This type of annuity can be bought using the tax-free lump sum you get when your pension becomes available, or from other money outside your pension pot. One of the key benefits is tax efficiency.

Every payment you receive will include some of the capital you invested, plus interest. Only the interest element is subject to income tax. You can protect the capital element of your annuity so it can be returned to your estate when you die. Choosing the ‘no form of protection’ option, means your invested capital cannot be retrieved.

Lifetime annuity

A lifetime annuity will pay you an income for as long as you live. If you’re worried
you may live on after your money has been used up, then a lifetime annuity will give you peace of mind.

Payments are guaranteed so you are protected against that happening. You don’t have to restrict your retirement income by putting it all into an annuity. You could buy an annuity with part of your pension that just covers your monthly outgoings and increases in step with inflation.

Fixed-term annuity

This type of annuity will pay you for a guaranteed period of time. You can arrange for your annuity to pay you for just one year, 5 – 10 years, or as long as 40 years.

The money you pay for your annuity is invested and when the term ends you receive a guaranteed ‘maturity’ payment. You can use it to buy a flexible pension or take advantage of more favourable annuity rates.

Enhanced annuities

If your life expectancy is limited due to serious health problems, an enhanced, or ‘impaired life’ annuity will give you more income. Recognised illnesses include cancer, coronary failure, chronic asthma, diabetes, kidney failure, MS and stroke.

Other health conditions, such as obesity and smoking, may apply. This depends on the provider who will base the annuity rate on the number of years you are expected to live.

Investment-linked annuities

This is for you if you like the idea of receiving a guaranteed income from part of your pension, while the rest is invested. If the investment performs well, your income will be boosted. As with all monies invested, the value of your fund will fluctuate.

How much retirement income will I get from an annuity?

Calculating your retirement income from an annuity will depend on:

• How much you have in your pension pot
• Your age when you buy the annuity
• The length of time you need the annuity to last for (fixed or lifetime)
• The annuity rate at the time of purchase
• Where you decide to live after retirement
• How healthy you are and your lifestyle
• Which annuity is recommended

Which annuity is best?

The best type of annuity for you will depend entirely on your personal circumstances. Things to consider should include your health, life expectancy, what you want to do in retirement and who you want to benefit from the annuity when you die.

Depending on whether you live alone or have a partner will give you the option to choose a single or joint life policy. It’s best to discuss all your options with a financial adviser.

What are the alternatives to buying an annuity?

Annuities are not the only option for income in retirement. You may be recommended:

• A pension drawdown product that will give you more flexibility with the amount of money you have access to
• To take all your pension as one lump sum to invest
• To withdraw smaller lump sums over time
• A mixture of options to get the very best of what an annuity and a flexible drawdown pension can give you
• To leave your pension where it is and delay using it

How can Spectrum Advice Network help?

We can give you advice on the most appropriate annuities available, tailoring these to your individual circumstances. We’ll also make you aware of all the other pension options available. Not only will we save you time and money, we can help you plan properly for your retirement.

Contact us today for an initial, informal discussion about your retirement plans. 

The purpose of this guide is to provide technical and generic guidance and should not be interpreted as a personal recommendation or advice. Any tax treatment depends on the individual circumstances of each client.