Types of Annuities
Pension Annuities: choose one to suit you
Impaired and Enhanced Life Annuities
Some providers will offer an impaired (or enhanced) life annuity at a higher than average rate if your health is poor and if your life expectancy is expected to be lower than the national life expectancy figures.
Mortality figures have shown that geographical location can have an effect on life expectancy rates across the country and therefore you may receive a higher annuity rate simply based on your postcode.
Research shows up to 70% of people could qualify for a better annuity rate because of health or lifestyle conditions yet only 4% of people in the direct market buy an enhanced annuity at retirement.
Common Qualifying Conditions for an impaired/enhanced annuity:
- Heart disease
You do not have to be in serious ill health to qualify for an impaired/enhanced annuity. If you’re overweight, smoke or suffer from high blood pressure and/or high cholesterol some providers may offer you a higher-rate annuity.
The best route to purchasing an enhanced annuity is by using an independent financial adviser (IFA). Since enhanced annuities are individually underwritten a comprehensive health and medical questionnaire will be completed and depending upon the information provided the provider may write to your GP for further information.
Factoring in health and medical information has been known to provide an enhanced pension income over 50% higher than a standard pension income with some individuals receiving thousands of pounds of extra income each year for life.
These are types of annuities have the lowest associated risk and the level of income offered from outset is guaranteed for life.
Investment-linked annuity products (including with-profits and unit-linked annuities) will allow you to tap into any potential returns you may not receive if opting for a more standard annuity.
You still have to hand over your fund in return for an annuity income, but you stand to benefit from future stock market growth. Be warned that, as with all stock market-linked investments, there are no guarantees that annuity returns will improve or that your income will rise.
Purchased Life Annuities
These types of contract are similar to a pension annuity however instead of using your pension fund to purchase it you use a lump sum (such as life savings etc). Although a purchased life annuity will still give you a regular income through your retirement, your choices are limited to those of a conventional annuity, investment-linked or with profits annuities are not available.
You can select a purchased life annuity which fully protects your capital instead of simply offering a guarantee (payment of income for a set period i.e. 5 or 10 years). When you pass away, the provider will make a payment back to your estate equivalent to the difference between the lump sum paid to purchase the annuity and the income paid out to you. This can then be distributed among the beneficiaries to your estate. Please note that your estate will not receive any payment from the provider if the amount of gross income paid out to you throughout the life of the plan is higher or equivalent to the lump sum paid to purchase the policy.
Capital Protection and Guaranteed periods are options that can also be factored into pension annuity plans.
Purchased life annuities – tax implications
- Because the taxman sees some of the income you receive as a repayment of your lump-sum investment, only a portion of the income is taxable. This is taxed at 20% and normally deducted at source before you receive it
- If you’re already a higher-rate taxpayer, you’ll be liable to pay another 20%. But you won’t need to pay more tax if you’re a basic-rate taxpayer
- If you don’t pay tax, you can reclaim the taxable part by completing form R89. You can get this from your annuity provider or your tax office. Alternatively you can have the taxable part paid gross
- As a starting-rate taxpayer, you can reclaim 10% of the deducted tax
This is where your pension pot is invested in a unit-linked pension fund similar to a unit trust. Your level of income depends on the value of the assets represented by your units.
Depending on your investment goals you can alternate between your provider’s various different funds, bearing in mind this could cost you more. A unit-linked annuity that you invest yourself could allow you more control, but you do need to know something about investment procedures.
Because your investment returns don’t adjust over time, unit-linked annuities are more unpredictable and have a great level of risk involved than with-profits annuities (see below). If you have another income stream and you are comfortable with the additional risk, they can be worth considering.
Launched in 2006 and sometimes called a capital-protected annuity, this returns your built-up fund to your estate, minus any income that has been paid out and 55% tax, if you die before you’re 75.
If you think you could die soon after its purchase, a value-protected annuity might ensure some money is returned to your estate.
As with any type of with-profits investment, your returns adjust over time. Some are held back in the good years, allowing a better return if times are hard.
On arranging a with-profits annuity, you decide on an anticipated bonus rate (ABR). Your income is decided according to how the ABR compares with the insurance firm’s declared level of bonus.
For example, if you choose a 4% ABR and the firm declares a 6% bonus, your income increases. If the firm’s declared bonus is only 2%, however, your income drops.
While the highest initial incomes are realised by annuities with the highest ABRs, they’re less likely to rise over time.
Irrespective of investment growth, some with-profits annuities offer extra security by way of a minimum guaranteed income.
Call us now to receive advice on the most suitable annuity options for your needs.