Retirement is one of the most important stages in anyone’s life. After years of working hard and saving money into a pension it’s now time to secure your retirement income.

Buying a pension annuity converts the money you have saved in your pension into a regular income. Conventional and enhanced annuities will guarantee you an income for life while investment linked, fixed term or temporary annuities can increase or decrease your funds.

What is an annuity?

A pension annuity converts the pension fund you have built up over the course of your working life into a regular income, usually for the rest of your life.

If you have a private pension or ‘money purchase’ company pension you’ll be able to take some of the cash you’ve accumulated as a tax-free lump sum, typically up to 25%. All or part of the rest can be used to buy your annuity.

Pension annuities give you the security of knowing that you will always have an income and not outlive your pension savings.

Annuities at a glance

  • You can buy a conventional annuity from the age of 55
  • Rates vary by annuity provider and on other factors such as the size of your pension fund, age, health, lifestyle choices and even postcode
  • Key could boost your income by shopping around to see what rates are available
  • It’s important to consider all choices, not just the highest rates, to ensure your annuity suits your circumstances

Income from an annuity can vary according to

  • The size of your pension fund. Some providers offer better rates for people who can invest large amounts
  • Your age. The older you are the more income you will get each year
  • The options you choose when you buy your annuity
  • Your health. You may qualify for an enhanced annuity
  • Where you live. Providers may use figures on mortality rates linked to your postcode area to determine your annuity income

Get retirement options advice

Finding out in an annuity is right for you is just part of your decision making process when weighing up your retirement options. The range of options to choose from and their complexity can lead to confusion.

For help and advice on not just annuities but all your retirement options, our team of specialists are on hand. Request your free callback today and see what Key can do for you.


Types of annuities

You can, prior to the purchase of an annuity, take the tax free cash from your funds, typically up to 25%. The balance, or part of it, can then be used to purchase an annuity and provide the lifetime income. Any income generated is taxed as earned income. The income received is added to any other income and is taxed accordingly.

Conventional annuity

Conventional pension annuities (or compulsory purchase annuities) can only be purchased with the proceeds of a pension plan.

Once purchased, the level of retirement income is guaranteed to continue throughout your lifetime.

There are options to consider within this form of annuity, including a joint, guaranteed or inflation linked annuity.

A Key Retirement options adviser will be able to advise on your options.

Investment linked annuity

An investment linked lifetime annuity usually provides an income for life with the potential for a rising income.

The level of income is linked to underlying investment performance. Whilst the level of income can increase, based upon the investment performance, the level of income provided can also fall. Usually the income can only fall to a minimum level often referred to as a minimum income guarantee.

Investment linked annuities are investments. As with any investment, the value of your fund can go up or down and may be worth less than what you paid in.

Enhanced annuity

You don’t have to have severe medical conditions to reap the benefits of enhanced rates. There are over 1,000 qualifying health conditions!

Even lifestyle conditions like being overweight, being a smoker or drinking habits may mean you qualify. Any past or present health conditions are all taken into consideration. The more serious the condition the higher the retirement income could be.

Do you qualify for an enhanced annuity?

If you or your partner answer ‘Yes’ to any of the following questions, you may well qualify for an enhanced income.

  • Do you smoke?
  • Have you been diagnosed with high blood pressure, requiring ongoing medication?
  • Have you suffered a heart attack requiring hospital admission?
  • Have you been diagnosed with cancer (excluding skin cancer and benign tumours) requiring surgery, chemotherapy or radiotherapy?
  • Have you been diagnosed with Parkinson’s disease?
  • Have you been diagnosed with Multiple Sclerosis?
  • Have you taken early retirement on the grounds of ill health?
  • Have you been diagnosed with diabetes, requiring insulin or tablet treatment?
  • Have you suffered from a stroke (CVA), excluding mini-strokes (TIA’s)?

Comparing annuities

There are a number of different options to look at when comparing annuities that determine how much income you will receive and how often.

Description Meaning
Tax-free cash With most pension plans if you convert your pension savings you have the option to take up to 25% as a tax-free ‘lump sum’, the rest is taxed at your marginal rate. Alternatively you can add this sum to your annuity to provide a bigger income for life.
Spouse’s pension (Joint life) You can guarantee an income to your spouse, civil partner, or a dependant for the rest of their life after you die with a joint life annuity.
Health and lifestyle If your lifestyle or your health could reduce your life expectancy you may be able to benefit from an enhanced or impaired life annuity which pays a higher income.
Guarantee period You can guarantee your annuity for a specific number of years even after you’ve passed away. This will give you a lower level of income, but guarantees that your beneficiaries continue to receive an income, if you pass away within the guarantee period.
Payment frequency You can choose how often you want to receive your income: monthly, quarterly, half-yearly or yearly. You can also choose when the money goes into your bank account – at the start (in advance) or the end (in arrears) of each period. Being paid ‘yearly in arrears’ will give you the highest annual income, as this gives the provider company more time to invest your funds. ‘Yearly in advance’ will provide the lowest annual income.
Inflation protection You can decide whether your annuity will pay a fixed income (which will decrease your purchasing power over time due to inflation), or one that increases annually to protect you against inflation.
Value protection Some providers offer the option to allow you to protect a percentage of your purchase price if you die. You can choose to protect up to 100%. On death the provider will make a payment equal to your chosen percentage of purchase price less any annuity payments already made to you. The payment on death is age dependent. If death occurs before age 75 then the lump sum paid is completely free of tax. After age 75 the exact treatment is at the highest marginal rate of 45% on any withdrawals.

What to look for in an annuity

The options you choose for your annuity depends on what’s important to you. Ask yourself…

  • Do you want to guarantee an income for your spouse?
  • Do you want your income to increase annually with inflation?
  • Do you want to take a cash lump sum?
  • How often do you want to receive your income: monthly, quarterly, half-yearly or yearly?
  • Do you want to guarantee your annuity for a specific number of years?
  • Do you want to protect a percentage of the fund in case you die earlier than expected?

Don’t make a very expensive mistake

It’s very easy to simply sign your forms and accept the annuity offered from your current pension provider…but that could literally cost you thousands of pounds!

Don’t miss out on your opportunity to exercise your ‘open market option’. This allows you to search the market and get quotes from other annuity providers.

If you’re worried that it’s complicated and time-consuming Key can do all the hard work for you and give you expert advice on the retirement options which are appropriate for your needs.

Free guidance on retirement options is also available from the Government’s Pension Wise service.

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