When you take out an annuity, you convert your pension savings into a regular pension income. One particular feature of an annuity is that its sum will be paid directly to you, for as long as you live.
As you approach your retirement date, you will receive written notification from your pension provider, advising you of your options and letting you know the process for buying an annuity from your pension pot.
In previous years, the majority of annuities were purchased directly from the individual’s pension provider, mainly because most people didn’t realise that they were not tied to taking an annuity product from the same institution that managed their pension. However, awareness is growing and today a greater number of people realise that they can shop around and approach other providers of annuity products to get the best annuity quote possible. This is known as the ‘open market’ option and it is by far the best approach to getting the best annuity prices.
It is possible to start withdrawing your pension benefits, including your annuity, from the age of 55. You can also continue to work whilst you do this. The modern reality is that people are living longer than in previous generations and many people of retirement age will choose to keep working and delay the point where they begin to draw a pension. By doing this, they will obtain a bigger pension pot as time goes on. People are doing this for lifestyle reasons and also because some pensions haven’t performed as well as expected in recent years, due to the economic difficulties.
When you decide to take out an annuity, it will be based on a series of factors, primarily with regards to your other financial arrangements and monetary well-being for your retirement years. Put simply, if you have a range of non-pension assets and investments, or are continuing to work, you may be covered financially for the time being and prefer to leave your pension pot intact for a longer period of time, giving it further opportunity to grow.
There are annuities available for a range of circumstances and people. Single-life annuities tend to be favoured by individuals without a spouse or partner. Sometimes this can be because the spouse or partner has made individual arrangements for his or her retirement. Joint-life annuities pay out to the spouse or partner in the event of your death, but this will usually be at a lesser rate.
Level-income annuities also pay out to a spouse or partner in the event of your death, but the rate will be reduced. Level-income annuities will pay a consistent amount of income during your retirement, but this amount won’t increase with inflation and could erode in real terms over time. To compensate for this, escalating-income annuities will factor in inflation and pay increasing amounts during your lifetime, either matching inflation or at a fixed rate. These products will pay less than level-term annuity products initially, but over time they exceed the total payment amount of level-term products.
You will see products with guaranteed periods. This means that you will have an annuity guaranteed for a certain number of years. The product continues to pay you income for the specified time, even if you were to die during this period. In such an instance, the income would be paid to your dependent, spouse or partner.
With annuity-protection lump-sum benefits, you have the peace of mind of knowing that if you die before 75 years of age, your payments will continue. This represents a lump sum which is equivalent to your pension fund and with which you purchased your annuity, less income paid. This amount will be paid out to your beneficiaries or estate. Of course, there will be tax implications such as inheritance tax or income tax, depending on your circumstances.
Some annuity providers specialise in certain products, such as impaired and enhanced life annuity products, which pay a higher income to individuals with certain health complaints and problems. These products are offered to those with a lesser expected retirement life and are offered to those with conditions such as chronic asthma, cancer, high blood pressure, diabetes, multiple sclerosis, strokes or kidney failure. You may be able to get one of these specialist products if you smoke or are overweight or smoke. Some providers also give higher annuity rates to people with greater health risks, or for those living in particular areas of the country. You can find out if you qualify for one of these specialist annuities here.
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You could qualify for an enhanced annuity if you have a medical condition or lifestyle that means your life expectancy might be shortened.See if you qualify
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