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Glossary
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Annuities
Annuities Explained

When you reach retirement age, you can choose to receive a cash lump sum or an annuity. Annuities are guaranteed income for life paid to retirees on a regular basis. Annuities are only accessible to those people who have spent many years saving and investing in approved, tax-free pension schemes. These include personal or occupational pension schemes.

What are the different types of annuities? 

  • Conventional Annuities: Most annuities available are conventional and provide retirees with a risk-free regular income that is a guaranteed for life.

    The amount you receive will depend on the following main factors:

    • the size of your pension fund

    • your age

    • your gender

    • your general health

Choosing conventional annuities essentially means you are locking into today's gilt yields. This provides your guaranteed income, but it also means you cannot expect any form of growth in your retirement income levels.

Remember that most conventional annuities do not offer any flexibility. They cannot be altered, moved, or exchanged for cash.

  • Variable Annuities: Variable annuities are where you invest your retirement savings in an investment-linked retirement product for the opportunity of receiving an enhanced income when you stop working.

With variable annuities, you still receive a certain level of guaranteed income, but these provide less protection than conventional annuities. For instance, if you include guaranteed protection from inflation, this will reduce your starting income considerably.

Certain variable annuities allow you the flexibility to change your requirements. For example, if you buy a conventional annuity at the age of 60 which includes protection for a financial dependant, this would result in a lower income for yourself. However, as variable annuities allow you to change this, you can remove this protection in later life this giving you access a higher income.

  • Guaranteed Annuity Rates: There are some older pension policies which have special guarantees that mean they will pay a much higher rate than is normally available. If you are lucky enough to have one of these types of policies, you may receive guaranteed annuity rates or GARs which could effectively double or triple your income.

  • Impaired Life Annuities: If you suffer from poor health and are not expected to live as long as most other people of your age, you may qualify for enhanced payments with impaired life annuities. In order to qualify, you will need to be medically assessed.

What are the benefits of receiving annuities?

Here are some considerations to take into account before deciding whether you should opt for annuities:

Annuities have received a bad press in the past decade or so as a result of:

  • declining interest rates

  • weak stock market investment performance

  • longer life span

To give an example, a person saving in the mid-nineties over a period of 25 years would be able to retire comfortably on an annual income of approximately £14,000. In today's money, by saving the same amount, your income would be severely reduced by approximately 60%!

However, there are still some advantages to receiving annuities:

  • Annuities are the only way of receiving a guaranteed income for as long as you live. This gives many retirees a great sense of security which is priceless to some.

  • Level annuities will pay a fixed income from the start.

  • If possible, you should look into buying variable annuities that offer payments that rise in line with the retail price index; this is one way you can ensure your income keeps up with inflation.

Are annuities compulsory?

According to tax rules surrounding retirement, the majority of retirees are required to use their pension savings to purchase annuities by the time they reach the age of 75 years old.

If you have a company or occupational pension, it is likely that your company will encourage you to buy annuities. However, you have the legal right to refuse. If you prefer, you can shop around to find the annuities which suits you best.


Learn more about pensions

 

 
 
 
 
 
 
 
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