You’ve worked all your life, you’ve put some money aside in a pension scheme, and you’re ready to use it to live out your dreams in either ill health retirement, early retirement or at your normal retirement age. The question is: what is the best way to use your money?
Buying a pension annuity is one of the many ways your pension can be utilised. With pension annuities, there can be a lot to get your head around, so we are here to try and make it easier for you.
In this article will cover everything you need to know about pension annuities, answering the following key questions:
With all these questions answered in a simple way, hopefully by the end of you will be an expert in pension annuities and be ready to decide what to do with your pension pot.
The term annuity doesn’t sound that inviting, and combined with pension sounds like a quick path to zoning out! But we’re here to tell you that in fact it is quite simple, and can be something really good for you or your loved one.
Basically, if you are buying a pension annuity, you are purchasing an insurance product using some or all of the pension pot that gives you a guaranteed income for life. They are very different to taking pension drawdown which do not guarantee a regular income.
Before 2015 a pension annuity used to be the only option for retirees, but that isn’t the case anymore. With pension freedom came a lot of choices and annuities started to look like the boring, safe option that didn’t allow much flexibility.
For some people, maybe you, a pension annuity could be the best way to make use of your pension. Let’s take a closer look.
Pensions and annuities are two different, but very much linked sources of retirement income.
A pension is a fund/account offered by an employer to their employees usually as a final salary or defined benefit pension.
With the payout of your pension, you can typically receive it in monthly instalments alongside a lump sum.
An annuity is something that you buy, unlike a pension that is provided for you. You usually use your pension pot to purchase an annuity from an insurance company and what you receive from them is based on a number of different factors like:
If you are more of a visual learner than below is a great video that boils down what a pension annuity is, provided by BBC Radio 4 presenter, Paul Lewis.
A pension annuity is just one option available to you when it comes to deciding what to do with your pension. If you do choose a pension annuity then the options don’t stop there!
Within pension annuities, there are many different types available, and hopefully one of them is the right annuity for you.
A life annuity is the most common type of annuity. This provides a guaranteed income, paid just to you, for the rest of your life.
This is much like a single life annuity. The only difference is that it will continue to pay out to your partner or spouse after you die. This would be paid in addition to any widows pension or bereavement allowance that may be payable.
This and the single life annuity are good if you value simplicity and want to spend your time thinking about things other than what your pension quote is.
Pays out a guaranteed income for a set number of years. After the set number of years has passed, money still in your pension pot may be used to buy another annuity.
This is an option if you don’t want to commit long term or you think the rates may improve.
A short-term annuity is very similar to a fixed term, the only difference being that the set number of years is capped at 5.
Much like a short term one but the key difference is that it will pay out to for the set number of years even if you die within that time period. The money would continue to go to your spouse or partner, either in instalments or as a lump sum.
This option is based more around factors such as your health. If you are a smoker or suffering from a medical condition, then this annuity is likely to pay out more than a standard annuity.
The amount you receive from this annuity increases each year to combat inflation, but you will initially receive much less than from other annuities.
You’ll receive a fixed income each year. Opposite to the escalating annuity, it would start off higher, but the buying power would slowly decrease as inflation comes in.
This type of annuity is at the mercy of the stock market, so payments will vary depending on the success of the investments. Probably the more risky option but could pay out very well if the market is good to you.
Buying this annuity, you could protect some of the initial capital you used to purchase it. What is left of your initial payment would be paid to whoever you wish if you happen to die within the set annuity period.
If you decide to purchase an annuity, you only have a short time in which you can change your mind, so make sure you are certain of your choice.
Pension annuity rates change all the time, and it’s a simple fact that the rates aren’t as good as back in the day. However, if you have a pension scheme, you may have a secret weapon.
Guaranteed annuity rates are common in old pension schemes of the 80s and 90s so it may be time to dust off that old policy paperwork if you have it. The rates offered back then are much higher, and it may be better to stick with that rather than shopping around.
Your pension scheme provider may “forget” to remind you about this rate and instead offer a newer annuity product to you.
Take the time to look closely, you may end up benefiting greatly from your due diligence.
It pays to shop around. With pension annuity rates changing all the time, it is vital that you look around for the best deal for you.
What’s even better is that the FCA (Financial Conduct Authority) now requires all pension providers to let you know if you can get a better deal by looking elsewhere.
With the factors behind annuities being so varied from where you live, your age, and what annuity product you are after there is no definitive answer to the question of the best annuity rate available.
Depending on factors like age, plan, location, the standard annuity rate percentage could be as high as being over 5% and being low as just over 1%.
And of course, this is mostly thrown out the window if you have a medical condition and opt for an enhanced or impaired annuity.
If for whatever reason, your pension annuity provider cannot pay you, the FCA can compensate up to 100% of the value of your pension pot.
There are a number of annuity calculators available to access online. We strongly suggest doing your own research and putting in your details to an annuity rates calculator so that you can find the best pension annuity quote for you.
For the most comprehensive annuity calculator, we suggest the one provided by the Money Advice Service.
It is independent of providers and set up by the government to give impartial advice to people.
The link to the annuity calculator can be found just below:
Using the Money Advice Service pension annuity calculator and based on a single life annuity, that escalated due to inflation, you are looking at a yearly income of £5,712.
This rate comes in at 2.856% of the pension pot. The rate was also dependent on the income beginning at age 65 and being paid monthly in arrears.
The same calculator and conditions were used to check how much you would receive with £300,000.
The results are in…
£8,558, which offers only a marginal (and we mean marginal) difference in the percentage of the rate.
The good news (or bad news, depending on how you look at it) is that there are many companies out there for you to consider. So, with a little elbow grease, you’ll be able to find the best provider for you.
Below are the leading pension annuity providers in the UK.
Like the name suggests they specialise in retirement products. Just was formed in 2004, merging with Partnership Assurance in 2016 (briefly changing their name) before changing it to Just Group plc in 2017.
Last year they recorded revenue of 2.863 billion pounds, a 15% rise.
This company is an institution in itself, having been established in 1815. It is one of the most recognisable brands out on the market and well respected within the pensions world.
They have won numerous awards over the years, including Pension Firm of the Year 2019 at the FDs’ Excellence Awards.
They were founded in 1836 and had over £1 trillion in assets. They have core environmental and social values.
They are a leading provider in the UK.
As the name gives away the company was founded in Toronto, Canada in 1847 and has since expanded, operating in the United States, Europe and the UK.
In 2018 they acquired Retirement Advantage, a company that specialises in products for those in or approaching retirement age.
Aviva is a monster. They are the largest general insurer in the UK and have over 33 million customers worldwide, with 15 million of them being in the UK.
They put an emphasis on the customer, placing you at the centre of everything they do as a company.
Presenting themselves as the UK’s largest friendly society, since 1843 have grown into one of the countries largest insurance companies.
They have won numerous awards and garnered five-star reviews on a regular basis. In 2019 customers voted them the winner as Moneywise Most Trusted Life Insurance provider for the seventh year running.
That was a lot to take in, but I hope what we’ve given you here is the jumping board for your own exploration into pension annuities.
If you haven’t seen enough, then there are many articles and websites available to you online, both for and against annuities. This recent Guardian article presents a very balanced view of the issues around pension annuities:
Even with all this research, it is strongly recommended that you look at finding a financial service advisor.