Annuities

The basic principle

The only simple thing about an annuity is a textbook description of what one actually is and what it purports to do. Put simply, an annuity is a guaranteed income for life paid by a Life Company in exchange for your pension fund (or, indeed, any lump sum).

As long as you’re alive, the payments continue; the minute you shuffle off this mortal coil, unless you’ve bought a particular type of annuity with surviving spouse benefits, the payments stop.

The trick is to live long enough so the total monthly payments to you in retirement are greater than the original lump sum you handed over to the Life Company. Because if you hand them your pension fund and then fall under a bus six month’s later, the Life Company keeps the lot in some cases.

There are only two consoling factors in this situation. First, you can take 25% of your fund as a tax-free lump sum on retirement. Second, you can take your pension to the annuity provider that will give you the best return on it.                

Shopping around

And that’s what you should do with an annuity – let us shop around for the best deal for you, or do it for yourself if you feel up to it. Wide margins exist in the market - even when the same benefits are required for the same annuitant, the difference between the highest paying annuity provider and the lowest can be as much as 25%.

For this reason alone, you should never simply accept the annuity offered by your existing company when you have the legal right to take it to another Life Company offering a better rate.

Shopping around does make sense, simply because the choosing of an annuity is irrevocable: once you’ve plumped for one, you’re stuck with it.
If 25% is the biggest margin of difference, and you have a pension fund worth £100,000 (just to keep the figures nice and round), if one annuity provider offers £6,400 a year and another offers £8,000, that’s a difference of £1,600 a year. Ten years down the line, that’s £16,000 you’ve lost out on.
               
Getting the best deal

The annuity market and annuity rates change on a daily basis. This is because, at various times of the year, life companies are looking to get more single premium business onto their books. So they offer a relatively attractive rate for a very, very limited period. That’s why you never get one company dominating the 'best buy' annuity tables.

This, and the fact annuity rates are at a 30-year low, means you have to get the best deal you can to secure the best income possible.

To know which companies are offering the best deal, you have to trawl the market, and this is something you’d be hard pushed to do without some form of professional help.

Surrey Financial Advice can help you get the best out of your pension fund. Remember, any initial consultation is free of charge (apart from a cup of coffee, perhaps) and you are under no obligation to proceed. [Contact Us]
               
Factors affecting annuity rates
Spouse protection
Inflation-proof retirement income
Impaired life annuity
Three tips for the potential annuitant
Know your annuities

If you require more detail, then here is a useful link to the FSA guide to Pension Annuities:
http://www.fsa.gov.uk/consumer/pdfs/annuities.pdf