Drawing your pension - Annuity Purchase
An annuity is a contract between an individual and an insurance company. The individual pays a sum of money to an insurance company from his or her pension fund. In return for this money, the insurance company will provide the 'annuitant' with a steady income for the rest of their life. However, once the annuity has been set up, it cannot be changed.
The annuity is a gamble. The individual is hoping - as we all do - that he or she will live a long time, and that, as a result, the annuity will continue to pay an income throughout life. The insurance company, conversely, is betting that the individual will not and, like a casino, has worked out the odds in its favour, in this case using actuarial and life expectancy information.
The highest level of income that an individual can expect to secure in exchange for their pension fund will be a single life level annuity: in other words, the annuity would be purely linked to the individual's life and it would not increase in payment. There are, in fact, a wide variety of possible payment options, all of which will have an effect on the cost. You have a known quantifiable fund at retirement, therefore the effect of adding certain additional features to the annuity will bring down the level of income on offer.
You can, for example, include a dependant's or spouse's pension, you can arrange for the income to increase each year to offset inflation and you can even build in certain insurances to ensure that an income is paid for a certain period of time regardless of whether you and your spouse dies.
Certain providers offer better annuity rates to smokers and those in ill health. One insurer has even developed a socio-geo economic annuity that pays better rates to those doing manual work and living in certain parts of the UK.
For the more adventurous you can link your annuity to an investment - but you should bear in mind that your income will become investment linked and there is the potential for your income to fall in unfavourable investment conditions.
Once you have decided that annuity purchase is right for you, and the annuity options to be included, maybe following help with one of our advisers, you can then engage us to identify the most competitive terms in the market. It is essential that you understand that the provider of your pension may not offer you the best annuity terms and that obtaining comparative quotes and researching alternative providers could make a big difference to your retirement income.
