If you’re thinking about buying an annuity with one or more of your pension funds, it’s important to carefully consider all the options available to you. Every option has pros and cons, and you should shop around to ensure you find the product that’s right for you. To get you started we’ll be looking at 5 reasons to buy an annuity:
You won’t outlive your money
One of the main benefits of buying a lifetime annuity is that you won’t outlive your money. Once purchased, a lifetime annuity provides you with a guaranteed income for the rest of your life, so you will have an income until you die. However, depending upon your selected annuity options your income may not keep pace with inflation.
The peace of mind offered by a guaranteed income from an annuity may be more important to you than a potentially higher but fluctuating income from another, more unpredictable pension option such as drawdown. For more information on the differences between a lifetime annuity and pension drawdown see our guide ‘Annuities vs drawdown - Should I drawdown or buy an annuity?’.
You may receive a higher income if you have certain health conditions and/or are overweight, or smoke
Annuities work differently to life insurance. If you are in poor health and suffer with certain medical conditions or if you are overweight, or smoke, you may be entitled to an enhanced annuity income. An enhanced annuity will provide you with a higher income compared to a standard rate annuity and will be paid for the rest of your life, even if your health improves. To find out more about enhanced annuities and who may be eligible see our guide ‘What is an enhanced annuity?’.
Your income will not be affected by outside factors
When you buy an annuity, your annuity rate is fixed (unless you have chosen for it to increase in line with inflation, by a variable amount up to 5% or by a fixed amount up to 10%), and your annuity income will normally not be affected by outside factors once your payments have started. For example, should annuity rates fall in the future your annuity income will not be reduced, but equally, you will not benefit from any future rise in annuity rates either.
You can avoid stock market volatility
Unlike income from pension drawdown schemes, your annuity income will not be affected by stock market volatility. The amount of money you will receive is agreed when you buy your annuity so even if the stock market were to crash your income would stay the same.
However, your annuity rate will not benefit from any future growth in the stock market. So, if you would like the potential to grow your pension fund by investing in the stock market, you should speak to a financial adviser about an income drawdown scheme. You should assess your personal attitude to risk before making a decision.
You know exactly how much income you will receive
Buying an annuity is a one-time purchase and does not require any ongoing management. Once you have selected your payment options and your annuity is in payment you will receive the agreed income from your annuity provider and will be able to plan your finances knowing exactly how much money you will receive as an annuity income.
There is, however, little flexibility around how much of your pension fund you can take as income and when. This means you are unable to take less income when your outgoings are fewer or take more on those occasions where your spending is greater.
For more information before you decide…
Converting your pension savings into an income for your retirement is a significant and irreversible decision, so while it’s important to understand the benefits of purchasing a lifetime annuity, it’s equally as important to understand the downsides.
We have detailed some of the top reasons to buy an annuity in this guide. If you would like further information on annuities, including their benefits and downsides, take a look at our guide ‘What are the benefits of taking out an annuity?’ which details the pros and cons or browse the rest of our helpful content in our annuities explained section.
If you decide an annuity is right for you it’s a good idea to shop around and ensure you get the best lifetime annuity rate available. Annuity Ready allows you to compare annuity rates from all providers in the annuity open market with one online form. If you’re ready, compare annuity quotes now.