Annuities Explained

What is an annuity?

An annuity is an insurance policy that you can buy with a lump sum to provide a regular income.

There are different types of annuities available that can provide different levels of income for you. It’s important to consider your personal circumstances to help you choose an annuity that’s right for you.

The most common type of pension related annuity is known as a lifetime annuity. This provides you with the security of a guaranteed income stream for the rest of your life. AnnuityReady allows you to compare lifetime annuity quotes online.

Once you have bought an annuity you can’t change your mind, so it’s important to shop around for a deal that suits you. At AnnuityReady, we have built a lifetime annuity comparison site that gives you the convenience of shopping around in one place, without the need to complete multiple forms or make lots of phone calls. When you find a lifetime annuity that suits you, we make sure you get to the right place in order to buy a lifetime annuity online.

What is a lifetime annuity?

As you approach retirement, you will have some important decisions to make with your pension savings pot. Probably most important of all is how to secure enough income to live out the rest of your life in comfort.

One option is to convert the pension pot you’ve built up into a regular income. You can do this by buying what is called a ‘lifetime annuity’.

Quite simply, an annuity pays you a regular income. Once in payment, it’s payable for the rest of your life, no matter how long you live. It’s important to take the time to consider all the annuity providers and options available as once purchased you can’t change the annuity. AnnuityReady offers all the lifetime annuity providers available in the open market.

The income you’ll receive will be subject to income tax. The amount of tax, if any, will depend on your individual circumstances and may change over time.

Should I get a lifetime annuity?

If you need, or prefer, the certainty of a guaranteed retirement income with your pension savings, then a lifetime annuity may be right for you. You have the right to shop around with your personal pensions fund, so you are not restricted to take an annuity with the same company you saved with. You could find a better income with a different provider.

What is a joint lifetime annuity?

Similarly, a joint life annuity provides you with the same guaranteed income for life as a standard life annuity but with the additional benefit of transferring to your named spouse, partner or financial dependant should you die before them, paying them a regular income for the rest of their lives. The income paid to your spouse or partner will be a proportion of the income you were receiving before your death, which you decide at the point of buying your joint-lifetime annuity. The higher the proportion that you set, the lower that your retirement income will be.

Should I get a joint lifetime annuity?

A joint lifetime annuity can be a suitable option to those with spouses or partners who are without their own pension arrangements, or if their pension payments won’t cover their long-term financial needs. The initial income will usually be lower if a joint lifetime annuity is selected.

Where can I buy a lifetime annuity?

You don’t have to buy your lifetime annuity from your current pension provider. Your pension provider will strongly recommend that you shop around and compare quotes, as different providers will offer different options. So, you can choose an annuity that meets your needs and potentially receive a higher income from another provider. With AnnuityReady, we will help you get competitive quotes from our panel of annuity providers. We would encourage you to compare quotes with different options to find the best options for you.

If you have a number of pension plans taken out with different providers, you may wish to combine them into one annuity.

There are several different types of annuity available on the market, but not all providers offer the full range. You need to make sure that the one you buy is the one that best suits your circumstances.

Some pensions have valuable guaranteed benefits such as guaranteed annuity rates or options. So, you need to check with your current provider that you are not giving up any valuable guarantees of protection. By purchasing your annuity from another provider or changing your retirement date you may lose these guarantees.

If you’re invested in the With Profits Fund, a Market Value Reduction (MVR) may apply when you take your retirement benefits. This MVR could be more, or less, than the pension providers illustration. By taking your retirement benefits on the date you selected when taking out the pension plan you can usually avoid the MVR. Check your fund with your current pension provider.

How much income will I receive from my lifetime annuity?

You can tailor your annuity to meet your needs, including to provide for another person after you die and an increasing income. The options you choose will affect the income you’ll receive in addition to a number of other factors, the main ones being:

Your age
The younger you are when you buy your annuity, the longer the income may have to be paid. This normally means that at any one point in time, the income paid to a younger person would be less than the income paid to an older person from an annuity bought with the same amount of money. For example, if you are aged 60 with a retirement pot of £100,000, you will receive a higher income than someone aged 55 years, assuming you choose identical annuities at the same time and you are both in good health.

The amount of money in your pension plan
The level of income paid will depend on how much money you have in your pension fund and the annuity rate you are offered. The total income paid from your annuity could be less than the amount used to buy it. For example, if you selected an annuity for your lifetime and died shortly after purchasing the annuity.

Your state of health
The healthier you are, the longer you’re likely to live. And the longer you live, the longer your income will have to be paid. However, if you have, or have had, certain medical conditions such as cancer or heart attack or, lifestyle factors such as smoking, you may be eligible for enhanced annuity rates, qualifying you for a higher income. So, it is important to include any medical conditions at the quotation stage.

Investment market conditions
The annuity rate offered by the different providers will depend upon their view about future investment returns. Hence, it’s always a good idea to compare the different providers annuity rates. With AnnuityReady, we will help you get competitive quotes from our whole of market panel of annuity providers.

What is Value Protection?

A lifetime pension annuity provides a guaranteed income for the rest of your life, but when you die the annuity dies with you. To protect your annuity fund, you have a few options to choose from.

Value protection, also known as capital protection, is a death benefit option which allows you to protect all or part of the pension fund used to purchase your pension annuity. This option can return a lump sum to your beneficiaries or estate if you die without having received the full value of your pension fund.

Another death benefit option is the guaranteed minimum payment period. It works by providing a guaranteed period over which the annuity will be paid. The annuity will continue to pay to your beneficiaries or estate over this guaranteed period if you die during this initial term.

You also have the additional option to add what’s known as a ‘dependant's income’. This means when you die, a proportion of your annuity income is paid to your chosen dependant. This could be your spouse, civil partner or financial dependant.

How does value protection work?

You can choose to add value protection to your annuity without selecting a dependant’s income. If only value protection is selected, when you die, your estate or beneficiaries will receive a lump sum for the difference between the chosen protected percentage of the pension fund and the total income you received before you died.

For example, if you paid £100,000 for your annuity and selected 50% value protection (£50,000). If the total of the income payments you have received was £40,000 at the time of your passing, your chosen beneficiary or estate will receive £10,000 as a lump sum.

If your policy has already paid out more than the protected amount, there will be no lump sum paid out after your death.

How does it work if I choose a dependant’s income as well as value protection?

Where a dependants income is chosen, most providers allow you to choose for a lump sum to be paid after your death or after you have both died. They may limit the percentage of value protection available when you choose a dependant’s income.

Value protection payable after your death.
If in the above example, you selected a 50% dependant’s income as well as a 50% value protection payable after your death, and the total income payments you have received was £40,000 at your passing, your chosen beneficiary or estate will receive £10,000 lump sum.

Your named spouse (or civil partner or financial dependant) will also then start to receive an annual income based on your selected 50% dependant’s benefit. So, if for example, you received £1000 a month as annuity income when you were alive, then your dependant will receive a monthly income of £500 as well as the estate or beneficiary receiving a £10,00 lump sum.

Value protection payable after the death of both you and your spouse/dependant.
Should you select a spouse’s (or civil partner or financial dependant) income as well as value protection payable after you have both died, the value protection will take into account all payments made to both you and your spouse.

In the above example, if you paid £100,000 for your annuity and selected 50% dependant’s income and 50% value protection (£50,000), and the total of the income payments you have received was £40,000 at the time of your passing, payments of 50% would be made to your spouse/dependant. If at the time of their passing your spouse had received a further £8,000 of income payments (£48,000 of income payments received) a lump sum amount of £2,000 would be payable to your estate or specified beneficiary.

What does Value Protection it cost?

The cost of adding value protection to your annuity depends on a number of factors such as your age and your health history. It’s worth bearing in mind that adding value protection to your annuity will mean your annuity income will be lower than if you chose to have no protection. It’s always worth obtaining additional quotes if you are considering this option to compare the impact on your income and ensure you get the best deal possible for your circumstances.

Should I choose to protect my annuity?

If you die in the early years of your annuity plan, the total income you receive may be less than the pension fund used to purchase the annuity. Selecting a death benefit, either value protection or a guarantee minimum payment period, allows you to protect against this.

Value protection could be a smart choice if you wish to potentially leave a lump sum to your loved ones. You need to consider your needs, the impact of selecting the option on your income level as well as considering the other options available such as a guaranteed minimum payment period.

You should read the providers key features on the taxation of these benefits.

If you have loved ones who rely on your income, such as a spouse, civil partner or financial dependant, value protection or other options available such as a dependant’s income and guarantee minimum payment period, could offer assurance that your family will be supported financially when you are no longer able to provide for them.

Need advice about annuities?

At AnnuityReady, our friendly customer services team can provide you with support about your application and your online quotes, helping guide you through the process from start to finish. As a non-advice service, we are unable to give you financial advice.

AnnuityReady recommends the following services:

The Money and Pensions Service

The Money and Pensions Service is a free and impartial guidance service set up by the Government. Bringing together three existing bodies of financial guidance: the Money Advice Service, The Pensions Advisory Service and Pension Wise into one single organisation it offers you:

  • Tailored guidance (online, over the telephone or face-to face) to explain what options you have and help you think how to make the best of your pension savings.
  • Information about the tax implications of different options.
  • Tips on getting the best deal, including how to shop around.

01159 659 570

Financial advice
If you require advice, we recommend you speak to an independent financial adviser (IFA). can help you find an IFA.

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