Tax, investments and pension rules can change over time so the information below may not be current. This article was correct at the time of publishing.

Should you buy an annuity? What you need to know about annuities

If you have a money purchase pension scheme, an annuity is one way of receiving income when you retire. Many people are worried about outliving their pension pot and an annuity is one way to ensure this does not happen as it provides a secure, regular income for the rest of your life. As with other pension options, you can take 25% of your pension tax-free and then buy an annuity with the remainder.

What is an annuity?

An annuity is a secure, regular income which you buy from an insurance company with a lump sum from your pension. It provides you with financial security knowing you will not run out of money in retirement. This option may be suitable for those who do not want to take any risk with their retirement income.

Can I buy an annuity without a pension?

Yes, you do not need a pension to buy an annuity. You can buy an annuity using a cash lump sum that you have saved into a savings account or have inherited.

How often do I get income from an annuity?

You can choose how often you receive income from your annuity. For example, monthly, quarterly, every 6 months or annually.

What factors determine how much money I can receive from an annuity?

The amount you will receive from an annuity depends on a number of factors, including your age when you want the annuity to start, your health, if you smoke, where you live, the amount you want to spend on the annuity, interest rates and the options you have chosen to tailor your annuity.

What happens to the money in an annuity when I die?

This depends on the annuity you have selected. Some annuities only pay you an income when you are alive, which means you could get back less from your annuity than you paid for it. You can choose to provide income for a spouse or another beneficiary after you die, but this may reduce the amount of income that your annuity provides. Alternatively, you can choose to have annuity protection which pays a lump sum to your spouse or chosen beneficiary after you die.

Speak to a Financial Advisor

What are the disadvantages of an annuity?

The main disadvantages of an annuity is that this income may be smaller than you could achieve through a different retirement option. For example, drawdown might offer you more income as your pension pot remains invested so can continue to grow. An annuity also does not give you the option to vary your income should you need to, for example if you want to go on a holiday.

Another disadvantage of an annuity is that once it has been set up the basis of the annuity (frequency of payment, escalation basis, death benefits etc) cannot be changed.  However, the income level can be varied in certain prescribed HMRC circumstances, and since April 2015 in some instances the annuity income can vary in line with the parameters stated in the annuity contract at outset. At Four Wealth Management, your financial adviser will work with you to determine if an annuity is suitable for your circumstances.

Annuity rates can change substantially and rapidly, there is no guarantee that when you do purchase an annuity the rates will be favourable, which means that your pension may be less than you had hoped. If a fixed income option is selected, the payments will be impacted by inflation.

How to find a good annuity deal

Once you have bought an annuity, you are unable to change it. Therefore, it is important that you compare annuity rates before buying one. There are many different annuity providers who will offer you different amounts of income and have different terms. At Four Wealth Management, your financial adviser can find the best annuity quote for your circumstances.

How do I know if an annuity is right for me?

Some annuities may be more suitable than others for your particular circumstances. Our financial advisers are experienced in taking the time to understand your aims and goals in order to determine which retirement option will suit your circumstances. If an annuity is right for you, they will help you to find the best value option. If an annuity isn’t right for you, they can discuss the other options available to you. Your financial adviser may determine that you need to combine retirement options, for example buying an annuity and taking some income from drawdown.

Contact us to arrange a no-obligation review of your finances and determine what retirement option is best for you

Enquire Now

If you have any queries or would like to arrange a face to face meeting with an advisor for a no obligation review of your personal finances, simply book a call back using the form below. Alternatively, you can call us on 0117 973 0500.

The Partner together with St. James's Place Wealth Management plc are the data controllers of any personal data you provide to us. For further information on our uses of your personal data, please see the Partner's Privacy Policy or the St. James's Place Privacy Policy.

Share this article

Share on google
Share on linkedin
Share on print
Share on email