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What is an Annuity? |
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Annuities allow you to convert the money you have saved up during your working life or have amassed via your pensions, into an extra income for the rest of your life. There are two distinct types of annuity |
Purchased life annuities:
These are annuities purchased with your own money such as from your bank or building society or the cash free lump sum received from your pension fund. These have no minimum or maximum starting age. As such, apart from boosting retirement income they can also be ideal for trust funds and compensation from personal injury claims.
Pension annuities:
Current rules dictate that everyone who has a money-purchase pension (also known as a defined contribution plan) which includes:- |
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Personal pensions – private arrangements only available since 1st April 1988.
Stakeholder pensions – private plans which first became available in 2001.
Group personal pensions – personal schemes arranged on block through employer.
Retirement annuity contracts – fore-runners of personal pensions which ceased to be
available from the 30th June 1988.
Additional voluntary contribution (AVC) schemes – additional contributions made to enhance your company pension scheme.
Free standing AVC (FSAVC) schemes – privately arranged contributions made with an insurance company to top up your occupational scheme.
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has to buy an annuity by the time they reach 75. In the case of personal pensions, stakeholder and group personal pensions, this is usually with at least 75% of their pension fund(s). For this reason they are also referred to as Compulsory purchase annuities. The remaining 25% can usually be taken as a tax-free lump sum that can spend as you wish.
New rules applicable from 6th April 2006 will also permit such lump sums from FSAVC’s , AVC’s and State Earnings Related Pensions.
If you have been in a company final salary scheme there is no need to worry about annuities as your pension will be paid direct from the scheme and is normally a percentage of your final salary.
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Advantages of Conventional Annuities
- The income produced is guaranteed for life.
- The income cannot decrease.
- They are simple products.
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Disadvantages
- No flexibility to alter income produced to suit changing needs.
- No access to capital - once purchased you cannot surrender them.
- Annuity rates can be low for younger lives.
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