Advice on Annuities
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Your Options

Choosing the right annuity can make a big difference to your retirement income. It is very important to consider all options before deciding which annuity to buy as once you have bought an annuity you cannot switch. Which one you choose should depend on (a) the type of pension you are looking for, for yourself and anyone who is financially dependent on you and (b) your attitude to risk.

There are three main types of annuity. Feel free to click on the links below to explore your different options:

Conventional annuities

With Profit annuities

Unit Linked investment annuities

Additional Options

Conventional Annuities

These are the most popular type of annuity where the income is provided by returns on Low risk Government Gilts and once secured the income provided is guaranteed for life. These annuities can either be ;-

Level
in which case the income will be the highest available at the outset, but overtime the income will be eroded by inflation.

Increasing Annuities
These overcome the shortcomings of the Level annuity, by increasing the income each year, either by;

Limited Price Indexation -where it is linked to the RPI but this time with a set maximum of say [5%]. If inflation is higher your annuity is only increased to 5%.

With Profit Annuities

With these the income is linked to the performance of a chosen Life Insurance With Profits fund. These funds invest in a mixture of bonds, cash, property and shares with the intention of smoothing out the fluctuations in returns to keep the income more stable than offered by direct Unit Linked annuities. Typically your income would be made up of two parts;-
A starting income which is normally very low but unless investment performance is very bad you should at least receive this amount.

An additional element which is determined by the Anticipated Bonus Rate (ABR) you will need to set at the outset based on what growth rate you feel is realistic for the fund to achieve. This ABR will normally be restricted to between 0-5% per annum. Obviously if you choose a higher bonus rate your starting income will be higher but also will the risk that the fund may not achieve the required growth rate to sustain the income level and, therefore, the following year your income will need to fall to realign the income to actual bonus rates. Should bonus rate turn out to be higher than the rate you selected, the income in the following year will be higher. Some of our providers allow you to make changes to the rate every year, which gives you the greatest control over future income needs, but others may limit it to just every 3 years. Some will also allow you to switch to a conventional annuity should you later decided you do not want the fluctuations; others may underpin such annuities with an automatic switch to a conventional annuity should the value of your initial income fall below a predetermined level.

Advantages

• Long term performance of the fund may increase total income received for people who live a long time
  
• Whilst not offering the guarantees associated with conventional annuities the underlying guarantee does offer more security than offered by full pension fund withdrawal.
  
• Bonuses added do offer some chance of increases in income to offset the effects of inflation.
  
• Bonuses when added cannot be taken away and offers some smoothing of investment returns.

Disadvantages

• As there is some element of investment the level of income can fall as well as rise if bonus rates do not keep pace with the anticipated bonus rate applied.
  
• Charges can increase during the life of the plan, which will mean the fund will have to perform better to maintain the chosen income level.
  
• Bonuses may be cut if people generally live longer
  
• The financial strength of the provider may decrease in the future causing them to reduce their exposures to equities, which in turn, will reduce performance and hence bonus rates, over the longer term.
  
• No guaranteed security of income levels, unlike conventional annuities.
  
• Minimum investment levels are higher than conventional annuities. We would normally only recommend such schemes if you have fund values of ain excess of at least £50,000 and have a medium to high attitude to risk and are prepared to accept volatility of future income.
  

Unit Linked Investment Anuities

As the name indicates, this type of annuity is linked to your choice of a provider’s range of Unit Linked funds and your income directly rise or falls in line with the fortunes of these chosen funds. These are innevitably more volatile, as if the fund drops by 15% so too does your income! Some of our providers will allow you to set an anticipated growth rate in much the same way as the ABR in With Profit annuities. The higher the anticipated rate, the higher the initial income, which in turn increases the chance that your income may fall.

Advantages

• Even greater opportunities for investment and therefore income growth than With Profit annuities.
  
• Charges are more transparent than With Profit annuities.
  
• Less dependent on providers own financial strength.
  
• Wide range of funds to choose from, giving greater opportunity for diversification.

Disadvantages

• The performance will directly reflect the performance of the underlying fund’s investment performance. Unlike With Profit annuities, there is no smoothing of investment returns.
  
• More volatile than both Conventional and With Profit annuities and both your income and capital are at greater risk of falls.
  
• No guaranteed security of income levels, unlike conventional annuities.
  
• Minimum investment levels are higher than conventional annuities. We would normally only recommend such schemes if you have fund values of at least £100,000 and have other forms of income
  

Should you decide an annuity is the best option for you, once you have decided which type of annuity would be best, you can further tailor your choice to your own needs by choosing from a range of additional options such as;-

Single or Joint – Most annuity types can be purchased to provide an income only for your life (Single Life Annuities) or until the latter of either you, your spouse, or partner dies ( Joint Life annuities). It can also cover same sex partners providing they are financially dependant on each other. Continuing income after the first death will inevitably reduce the amount of money received during the first annuitant’s life. You can select what percentage of the original income will continue to be received by your spouse/partner so that it best fits their ongoing needs - normally 50% or 100%.

Guaranteed Annuities - These allow you to guarantee that your income will be received for a period of 5 or 10 years so that even if you select a single life annuity, should you have the misfortune to die shortly after setting up the plan the income will not cease but will either continue for the remainder of the guaranteed period (the only option with 10 years guarantees) or have the remaining income converted to a discounted lump sum (only available with 5 year Guaranteed Annuities). Should you outlive the guarantee period selected, the income still continues until your death. A guarantee should not been seen as a substitute for a joint life annuity especially if your spouse would struggle financially without your income and annuity, as if you live until the end of the guarantee or you would normally expect them to outlive the guarantee, their income will cease. This option will reduce the income available compared to an unprotected single life annuity, but is normally less expensive than a joint life annuity.

Capital Protected Annuities – As an alternative to a Guaranteed Annuity, on Purchased Life Annuities some providers offer a Capital Protected annuity. Here the provider guarantees to repay (either by way of income or refund on early death) the original amount invested. So if you purchase an Annuity with £100,000 and you are due to receive an income of £10,000 per annum and you die 5 years later, as you will only have received £50,000 your estate will receive the remaining balance of £50,000. Once again this protection comes at a cost and is only offered by a few providers.

Frequency of payments – You can also choose how often you receive your income – either monthly, quarterly or annually. You can also select to have the income start immediately so that you receive the income in advance or in arrears. As the provider will have the benefit of your purchase money or pension fund for a longer period the most beneficial would be annually paid in arrears. However, you should select the option, which is best for your needs rather than just to maximise income. Should you choose an annuity paid in arrears, to protect your spouse or estate in the event of death occurring just before another instalment is due, you can further select the annuity to be paid “with proportion” meaning that a payment will be made equating to income due to date of death. Once again this reduces slightly the starting income compared to one “without proportion”where no such compensating payment will be received.

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