Annuity Purchase Occupational
What is an Annuity?
Who can buy an Annuity?
What features are relevant in working out the regular income?
Why should you shop around for the best deal?
How we can we help?
What is an Annuity? (top)
An annuity is the opposite of Life Insurance. In exchange for a regular premium a life policy pays a lump sum upon death, where as the annuity pays a guaranteed regular income for a fixed period or for lifetime in exchange for a lump sum.
There are many variations on the type of income that can be taken such as level income or increasing, single or joint, with a guarantee or without but there are two main types of annuities namely immediate or deferred.
As the names suggests an immediate annuity commences upon settlement of the lump sum also called the purchase price. The deferred annuity is payable at a predetermined time in the future.
For most people Annuity is an option that needs to be carefully considered when a regular guaranteed income needs to be provided upon retirement, usually from the proceeds of a pension arrangement.
Who can buy an Annuity? (top)
Trustees of a pension scheme can buy an annuity for a member of their scheme either upon leaving service before retirement or at retirement date, individuals can also exercise their open market option and purchase an annuity from the wider market with proceeds from a personal pension, stakeholder pension, additional voluntary arrangement, retirement annuity contract or a section 32 buyout bond.
If you have contracted out of the additional state pension there are statutory restrictions on the type of annuity you can purchase with the protected rights part of the fund. Where an individual has a spouse or a civil partner a spouse’s pension of 50% must be provided when the protected rights fund is utilised.
What Factors are relevant in working out the regular income? (top)
The amount of income you can get is dependent firstly on the purchase price. You may choose to take a tax free lump sum from your pension fund and in most instances this is a very sensible option.
Secondly it is important to choose the right annuity provider, as there are many insurance companies who provide annuities with some specialising in providing enhanced and impaired life annuities. The income that can be secured in such instances could be much higher.
Your Sex also has a bearing on the annuity payable. Mortality tables indicate that women tend to live longer than men and consequently get a lower annuity, however a recent ruling by the European Court of Justice (ECJ) means that Annuity providers will not be able to discriminate between men and women’s annuity rates and will have to provide unisex rates beyond December 2012.
Age is also an important factor, the older you are the higher the annuity you can secure. It goes without saying that if you purchase an immediate annuity at a younger age it will have to be paid for a longer period and hence the instalments would be lower.
Health and Lifestyle also have a bearing on the amount one can secure. A smoker in poor health with one or more health conditions would qualify for enhanced rates where as a healthy individual will qualify for the standard rates.
The regular income will also depend on the type of annuity required, i.e. Level or increasing, single or Joint, and based on the level of guarantee preferred – 5 years or 10 years or with protection of the purchase price.
For impaired lives where there is clear evidence that the individual’s life span is reduced, would qualify for better terms depending on the severity of the condition. In some instances it may be more sensible to defer purchase of any annuity and to consider an alternative strategy of income provision.
Why should you shop around for the best deal? (top)
Your pension provider may specialise in investing and in building up your pension fund but may not provide an annuity themselves or this part of the business may not be their strength which will be reflected in the income offered. It is always worthwhile to shop around for a more competitive deal and to also take into consideration your health as it could transpire that better income can be offered by a specialist annuity provider.
Whilst it is important to compare the annuity rates on offer from the wider market, it may not always be possible to get a better rate in every instance particularly if your pension provider has Guaranteed Annuity rates written within the policy, however you will have the peace of mind that an informed choice was made.
How can we help? (top)
We can guide you on the type of annuity you should choose taking account of your health, personal circumstances, and research the whole of the market before recommending a provider to you.
If you want to find out more about annuity options, have a look at the FSA's guide to retirement options.
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