These types of annuity will take account of any healthor lifestyle conditions that you may have. For examplewhere you live, whether you smoke, are overweight, have high blood pressure and any current or previous medical issues. By taking all these factors into account, they will make assumptions on your life expectancy.
An estimated 40% of people retiring could qualify for an enhanced annuity – giving them up to a possible 30% more income. So if your circumstances are likely to
reduce your life expectancy, you may qualify to receive a higher income in retirement. Don’t hesitate to tell your annuity provider if you have a medical condition.
If you’re not sure whether a condition you have is relevant, tell them anyway. Something you may consider irrelevant could actually give you the higher
income you want. It’s important to realise that not all annuity providers or
financial advisers offer enhanced annuity rates. That’s why it’s important to shop around to get the best retirement income.
To find out if you could be eligible for an enhanced annuity, complete the quick health check at the end of this guide. If you think you are, be sure to use your Open Market Option and shop around for the best enhanced annuity.
Can I change my mind after I have bought an annuity?
Once you have arranged your annuity you will have 30 days to consider your purchase and cancel the plan if you wish. After this time you cannot normally cancel or amend it. Because of this it is very important that you consider your long and short term needs carefully. You will want to think about the needs of your dependents, too, and choose the right benefit options for your circumstances. For instance, you may want to
ensure that your spouse continues to receive an income from your pension should you die within the first 10 years or so of retirement.
How safe are annuities?
An annuity is a very low risk means of providing your retirement income. The income from your annuity is guaranteed to be paid every year for the rest of your life, however long this may be. Building in certain additional benefits such as a guarantee period
or a spouses pension could mean that your pension income continues after your death for the benefit of your family.
As an annuity policyholder, you will also be protected by the Financial Services Compensation Scheme (FSCS). This means that should an insurance company cease trading, you will qualify for compensation. The FSCS will guarantee that at least 90% of your annuity will be paid and this will also include any features you have built
into the annuity, such as the level of spouse’s benefits and inflation cover. For further details of the FSCS please visit www.fscs.org.uk or contact them on
020 7892 7300.
What happens if I have more than one pension plan?
If you have more than one pension fund you can treat them independently for the provision of your retirement income. For example, you could take benefits from one
pension whilst leaving another invested. However, it pays to check whether better annuity rates are available for bigger funds. If so, it may be in your best interests to
combine your pensions.
Can I tailor my annuity to suit my circumstances?
Yes. Annuities offer a range of options and benefits to suit your needs. For instance you may have a partner or dependent who relies on your annuity income. And while it’s good to know that an annuity guarantees you a regular income until the day you die, If you were to die after only a year or two of retirement, your payments would cease. How would your partner survive then? And what about the effects of inflation on your income? You can opt to protect your annuity against these possibilities and more. However each one comes at a price – which will reduce your initial retirement income.
So the more options you choose, the lower your initial retirement income.
Continued income for a spouse or partner
If your spouse or partner is financially dependent on you, you may want your annuity to continue to support them, should you die before they do. In this case you will need to choose a Joint Life Annuity. A Joint Life Annuity gives you the option of paying your surviving spouse, partner or dependant anything up to 100% of the income you receive for the rest of their lives. Bear in mind that the higher the percentage you wish them to
receive, the lower your initial income will be.
If your spouse or partner enjoys a reasonable retirement income of their own, you may feel you would be better off with a Single Life Annuity. This will give you a higher
annual income in retirement. But when you die, your annuity will end and no-one else will benefit from it.
Protecting your income against inflation
A standard, or Level Income, annuity will pay you exactly
the same income from the start of your retirement until
the day you die. To guard against inflation you can opt
to ‘escalate’ your income every year. Simply choose a
Fixed Increase or RPI Increase annuity.
Fixed Increase
To help ensure inflation has less of an impact on your income, you can opt to increase it by a fixed percentage of up to 8% each year. This means your initial income
will be lower than that of a Level Income – but inflation will not have as much effect on it. In fact, over the life of your annuity you may even receive more income.
Retail Price Increase
Another option is to choose an annuity that keepstrack with inflation via the Retail Price Index (RPI). Selecting this option means you will receive a lower initial income than that from a Level Income Annuity. However your buying power will remain the same for
the rest of your life.
Safeguarding your annuity
You’ve worked hard all your life to build up a pension
fund so you can use it to provide you with an income in
retirement. So understandably you will want to protect
your fund. There are two ways in which this can be
achieved, either by what is know as a Guarantee Period
or by Value Protection.
Guaranteed period
To give you peace of mind and to help ensure you
and your loved ones receive a good return from your
annuity, whatever the future holds, you can guarantee
it for up to ten years. This means that if you die before
the end of the guarantee period you select, your
income will continue to be paid to your nominated
beneficiaries until the guarantee period ends. If you
have already chosen a Joint Life Annuity, this option
may not be necessary.
Value Protection
Value Protection is different from a Guaranteed
Period as it pays out a lump sum to your nominated
beneficiaries, should you die at any time before your
75th birthday.* This sum, paid as your Value Protection
payment, will be calculated as your initial annuity
purchase price, less any money already paid out to
you as income. Please note that the Value Protection
payment will also be subject to 55% tax. Remember
too that, as with all annuity options, choosing Value
Protection will reduce the amount of regular income
you initially receive.
You can choose Value Protection on a single life
annuity or on a joint life annuity.
Single Life Value Protection
In the case of a single life annuity, the Value Protection
payment will be paid out on your death (but only if you
die before your 75th Birthday*).
Joint Life Value Protection
The joint life Value Protection offered by most annuity
providers works on a joint life second death basis.
With this option, the Value Protection payment will only
be paid out if both you and your partner die before your
75th birthdays* – and the payment will only be made on
the second death. The Value Protection payment will
be calculated in the same way as the other option, with
any income payments already made to both you and
your partner being deducted from the inital annuity
purchase price.
Alternatives to buying an annuity
As we mentioned earlier, there are a few alternatives
to buying an annuity when investing your pension.
For instance you may want to defer buying an annuity
because you expect annuity rates to rise in the future.
If so, here’s what you can do instead;
Investment linked annuities
Investment linked annuities use investments such
as stocks and shares. This can help to overcome the
effects of inflation by helping protect the buying power
of your annuity.
AIM:
To provide an increasing amount of income throughout
retirement.
RISK:
Although investment linked annuities offer the
potential for growth and therefore higher income, they
also introduce an element of risk. If the investments fail
to perform as anticipated, the level of income received
from the annuity will fall. So if you are considering this
type of annuity you must be prepared for your income
to fluctuate over the years and therefore you need
to have other resources you can rely on should the
need arise.
Phased Retirement
Instead of converting the whole of your pension
fund into a single annuity you may opt to phase your
retirement over a period of time. You can withdraw
a series of tax-free lump sums and set aside partial
payments to provide income through annuity purchase
or Unsecured Pension. This allows you to take
advantage of changes in annuity rates and preserve
funds in a pre-retirement environment.
AIM:
To create a flexible retirement income with tax free
payments to supplement your pension. This can be
an effective strategy if you still have some earned
income and do not require your full pension and tax
free cash at the outset. By preserving some funds in a
pre-retirement environment, you allow your dependants’
greater flexibility of access to these funds in the event
of your death.
RISK:
Your pre-retirement fund remains invested and could
go down in value as well as up. Annuity rates could
deteriorate and, as a result, this could result in a lower
income in the future.
Important note
The alternatives to annuities are more complex and
carry more risk than conventional annuities. They also
usually incur higher charges which, when deducted from
your fund, may reduce your income. Some, such as an
unsecured pension, phased retirement and alternatively
secured pensions, may only be suitable if you have a
large pension fund or other substantial assets and are
prepared to take some risks with your pension fund
to get greater flexibility and a higher return. They also
require thoughtful planning and ongoing management.
If you wish to investigate any of these alternative
products, it could pay to talk to a financial adviser.
Please note:
All examples in this guide are fictitious and any
resemblance to actual persons is purely coincidental.
All graphs are for illustration purposes only.
If you have ticked one or more of the above boxes, you could be eligible for an Enhanced Annuity. For more information please contact your Financial Adviser.