A pension annuity, or, to be more accurate, a lifetime annuity, provides you with a guaranteed regular income for the rest of your life. A pension annuity is bought using money from your hard earned pension fund and is a low risk option – compared to other options. You may be entitled to a higher retirement income depending on you having certain health or lifestyle conditions, of which many can be taken into consideration.
The guaranteed income from a pension annuity really is a low risk option, and you get paid for the rest of your life, no matter how long you might live for. You can receive your income monthly, quarterly, half-yearly or perhaps annually. Payments can be ‘in advance’ (which are from the start date) or ‘in arrears’ (which are at your chosen payment interval after your start date).You may get a higher retirement income if you don’t have a clean bill of health or you currently have (or perhaps have previously had) one of a range of medical conditions which might affect your life expectancy.
You may also be eligible for a higher retirement income if you have lifestyle conditions such as you smoking or being overweight. There are literally hundreds of conditions normally covered. Once started, your income will not reduce, even if your health, or your spouses health, improves. However, depending on how long you live after you buy your pension annuity you may get back less money than you bought your annuity for, and there is no cash-in value. Once you’ve bought your annuity it cannot be changed at any time. You can take out an annuity that ceases whenever you die, or you can choose an annuity with a slightly smaller income but which is guaranteed to be paid for at least five or ten years, even if you should die during that time – this is known as the ‘guarantee period’. If you live beyond the selected guarantee period, the annuity will still carry on paying until you eventually die.
You can select at outset whether you receive the same amount of income each year, or your payments start off lower, but increase either by a fixed percentage per annum, typically 3% or 5%, or in line with the RPI, to offset inflation.
You do not have to take the annuity offered by your existing pension company. Annuity rates vary between companies so you need to check which one will give you the best deal.
Switching could boost your pension by hundreds of pounds a year or enable you to invest in a different type of annuity that better meets your needs.