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Standard and Level Annuities

Researching financial products can be a complicated exercise. If you’re looking into how to invest your pension fund, it’s one of the most important decisions you’ll need to make. Some of the options involve making decisions that cannot be changed later, so it’s important that you make the right choice first time.

One of the simplest ways of using your pension pot is to buy a standard, or level, annuity. These are one of the simplest and most popular types of annuity, with 90% of people choosing them. It basically pays you the same amount every month for the rest of your life.

Advantages of Standard Annuities

The main benefit of a standard annuity is that you’ll never live for longer than your money lasts. This provides you with financial security in your retirement and means that you can easily budget and plan for the future. During your retirement you’re meant to be able to take it easy and enjoy yourself, without having to worry about how much money you’ll be receiving.

Standard annuities are particularly beneficial for those with smaller pension funds and people who don’t qualify for an enhanced product. As they’re not linked to investments, there’s no risk to your retirement income. The amount you receive each month is guaranteed at the start of the contract.

They’re also advantageous for people who live longer, as you could end up receiving more than you actually invested. However, the opposite is true if you die at a younger age than expected.

Inflation Risk

People often opt for these products as they have a higher starting income than increasing annuities. However, the major disadvantage to buying a standard annuity is that the amount you receive stays the same each year regardless of inflation. Therefore, if the rate of inflation remains high for a long period, the actual buying power of your income will reduce over the years. This could cause problems in later life if you have no additional source of income, as the price of necessities such as utilities and food will continue to rise.

Choosing how to use your pension fund will affect how much money you have to spend during your retirement. Therefore it’s important that you think carefully and do some research before committing to a product. A standard annuity means making an irrevocable decision because once it’s purchased you can’t change your mind.

There is a wide range of products on the market and you could earn up to 35% more simply by shopping around. If you have any questions about level annuities, you should speak with an independent pension adviser.

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