Annuities

What is ‘Annuity’?

It is a regular annual payment in exchange for a lump sum investment. The annual payment can be paid monthly, quarterly or half yearly, in advance or in arrears.

It can be “guaranteed for your lifetime”, or a paid over a fixed term, with or without a guaranteed maturity value.

You can have a fully insured annuity or an investment linked annuity.

You might only be eligible for standard annuity rates, but if you take any daily medication or have any health or lifestyle issues, such as smoking, high BMI or high cholesterol or blood pressure, you could be eligible for higher rates because on average your life expectancy will be lower than average.

You should always shop around for annuities to be sure you are getting:

  1. The right type of annuity
  2. The right features to suit your needs and the needs of your family
  3. The right annuity rate and value for money
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Guaranteed Lifetime Annuity

These are the most common type of annuity.

A lifetime annuity is simply where you hand over a lump sum to an annuity provider in return for an income stream for the rest of your life. The annuity provider “guarantees” to pay the income regardless of how long you live.

It is unusual for your family to get any lump sum when you die UNLESS you add extra features to a ‘standard’ annuity. It is therefore vital that you understand your options.

  • With a standard annuity, if you only live a short time after handing over the lump sum, you and your family lose out because there has not been enough payments to recover the amount invested.
  • Conversely, if you live a long time, you gain. It is always worth calculating the “break even” point to see what value the annuity represents.

Want to know more?

Compulsory Purchase Annuity or Lifetime Annuity?
  • If you use a pension fund to purchase the annuity, you are buying a “Compulsory Purchase Annuity”, but if you are using a lump sum from a different source, it is referred to as a “Purchased Life Annuity”.The annuity rate is the amount of income that you will be offered for each pound of fund used.The rate offered is based on the average life expectancy for people your age and the investment returns available from the investments invested in the annuity fund by the provider.Inflation and Interest rates have a significant impact on annuity rates because annuity providers hold mostly of the funds in fixed interest securities.The annuity provider also factors in its own running costs and profit margins and any commissions that may be payable.These two types of annuity are taxed differently because one is considered a partial return of capital, whereas the other has been purchased from a tax advantaged pension fund.
Guaranteed Annuity Period

A Lifetime Annuity is guaranteed to pay out for the rest of your life BUT payments usually stop when you die.

However a “guaranteed period” can be added to an annuity so the payments continue for a specific period of time. It is the minimum payment period that will be paid out regardless of how long you live. You can usually choose a minimum payment period of five or ten years.
This can be particularly useful if your spouse is reliant on some, or all of your annuity, for a period of time perhaps until their own personal/employer/state pension starts.

If your spouse is reliant on your annuity for life, then you should consider adding your spouse to the annuity.

Adding this feature will reduce the annuity rate. Is it good value?

Single Life or Joint Life?

You can add a “joint life”, such as your wife/husband/partner, so that all or part of the annuity continues if you pass away.

Typically, you have the option of your annuity paying out at a rate of 100%, 66% or 50% after your death.

Adding this feature will reduce the annuity rate. Is it good value?

Indexation (Inflation proofing)

Men and women now have average life expectancy into their 80s, with many living into their 90s and 100s. Therefore, protecting your income against the effects of inflation is something to seriously consider.

If you retire at, say 65 with an annuity of £10,000, you will find that at age 70 and beyond that you will be able to buy significantly less with the same level of income.

The higher the rate of inflation, the worse it gets.

You have the option of selecting a fixed rate of indexation, such as 3% or 5%, so that your income rises by the selected amount each year to try and keep pace with rising prices.

Alternatively, you can link it to inflation (CPI or RPI), so that you have peace of mind that you will match this regardless of the actual rates in future years, which are uncertain.

Adding indexation does, however, significantly reduce the initial income available, so you need to look at all your assets and sources of income to work out whether you need indexation or if there is a better way of planning your finances to avoid the reduction in income, but providing some degree of inflation protection.

We can advise you of all your options and, if an annuity is the right solution, we will get you a range of quotes from the marketplace to help you get great value for money.

If a lifetime annuity is not right for you, perhaps you should consider a Fixed-Term Annuity, or an Income Drawdown plan.

Fixed Term Annuity

As the name suggests, a fixed term annuity will pay out for a fixed period of time. At the end of the term, if you haven’t used the whole of your pension fund, you may receive a maturity amount. Most annuity providers will quote different rates of income and maturity amounts, so you must be very careful to shop around and compare many providers.

As financial advisers, we are able to compare many providers and assess each one to be sure you get a good deal.

If you receive a maturity amount, one option would be to use it to invest in another retirement fixed term annuity, but maybe at the later age it might be better to switch to a lifetime annuity, or perhaps your circumstances have changed to justify using an income drawdown plan.

With professional financial advice, you will get a recommendation that suits your needs at the time of advice. If those needs change, then you should seek advice again.

Remember though that the maturity amount may not be enough to provide you with the retirement income you need after that, so again careful planning is required, ideally with the help of a professional pensions adviser.

In much the same way as when buying an annuity, you still have the other options available to you for example single or joint, level or escalating, and so on.

If you choose a higher income, the maturity amount will be lower.

Investment Linked Annuity

The payouts from an Investment Linked Annuity are tied to the stock market, so the amount they give you varies depending on the success of underlying investments. They start by paying an initial annual sum, which rises or falls in subsequent years.

An investment-linked annuity reinvests your pension fund in a range of different investments. The annuity will provide you with a regular income but the amount will be in line with how those investments are performing.

This means the value of your funds, as well as the income you receive can go up, but equally it can do down. That means the income you receive can be unpredictable.

You may be able to switch to a different type of annuity if you no longer want the risk of an investment-linked annuity – this will vary between providers.

Again, as financial advisers we will be able to guide you on whether this is suitable for you.

Enhanced Annuity and Impaired Life Annuity

Standard annuities are based on average life expectancy (as at 2015 this is approximately 83 for men and 85 for women), but not everyone is in excellent health when they purchase an annuity, so some providers offer enhanced, or impaired life annuities to people with known health or lifestyle conditions.

If you qualify, you can significantly increase your annuity income.

An enhanced annuity pays a known and guaranteed income for the rest of your life (or a fixed term if you prefer).

 

 

 

The main conditions that qualify for an enhanced annuity are:

  • Smoking
  • Diabetes
  • High blood pressure
  • Heart disease
  • Cancer / previous heart attacks / use of a daily medication (such as statins)
  • Kidney damage

Other conditions, such as asthma, high cholesterol, obesity and rheumatoid arthritis also qualify for increased rates, depending on their seriousness. Your life expectancy will be assessed based on health and lifestyle conditions, using a ‘common quotation form’. This ascertains the seriousness of your impairment.

We can help you choose the right type of annuity, with the right features and achieve a good rate by shopping around.

Annuity Benefits (not an exhaustive list)
  • Your retirement income is guaranteed in line with the options you choose at that time of purchasing your annuity.
  • You receive a known level of income, allowing you to budget. This is useful if you don’t want the risk of your income going down.
  • There are no investment decisions involved (unless you choose an investment linked annuity).
  • You are protected from any future reduction in annuity rates.
Annuity Risks (not an exhaustive list)
  • Once your annuity is set up, you cannot change your annuity options to reflect any changes in personal circumstances.
  • You will not benefit from any future increases in annuity rates once your annuity is set up (unless you opt for a fixed term annuity which can be revised on maturity).
  • You may not be protected against the effects of inflation if you have chosen a level annuity.
  • Indexed annuities provide a lower starting income, which could be approximately 33-50% lower than a level annuity.
  • If you select a single life annuity, without a guarantee period or value protection, and die shortly after setting up your annuity, there are no further benefits payable and you or your estate may not get back all the money that was used to purchase the annuity.
  • If the annuity provider becomes insolvent, the “guaranteed” annuity will be subject to the terms of any FSCS compensation scheme, which may mean your annuity is reduced. Therefore, taking the financial strength of the provider into account at the outset is very important.

Better still contact Astute Money Management Ltd to take the pressure of you and allow you to focus on running your business.
Call us on 01202 263856 or fill in our online form. One of our consultants will call you back and discuss the benefits our service can provide to you.

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Astute Money Management Ltd is an appointed representative of Sesame Limited which is authorised and regulated by the Financial Conduct Authority.

Sesame is entered on the Financial Services Register under reference 150427. The FCA does not regulate trusts and some forms of tax planning. Astute Money Management Ltd is registered in England & Wales (registration number 04206845) at address: 12 Meyrick Park Crescent, Bournemouth, BH3 7AQ