Choosing an annuity
Annuities have long been popular, because they're a way of getting a secure, guaranteed income for life in return for some or all of your pension savings. If a safe, predictable income for life is important to you, they could be helpful.
So are there different types of annuity?
Yes. We explain them in more detail on our types of annuity page.
If I don’t buy an annuity, what happens?
You don't have to buy an annuity straight away, or at all. And in some circumstances you may be able to use a portion of your pension to buy an annuity, rather than commit the entire amount. In all cases, there are some questions we'd ask you to think about very carefully:
- Can you afford to take any risks with the capital you've saved to date? With the exception of investment-linked annuities, all other annuities carry no investment risk to your pension savings.
- How will you pay for your cost of living in retirement without a guaranteed income?
- If you buy an investment-linked annuity or annuity alternative – such as another investment product, could you handle the thought of 'losing' money?
We’ve explained more about the decisions you’ll have to make, on our annuity options page.
OK, but as a basic guide – what should I remember?
- You can't change your mind – beyond any cancellation period you cannot reverse the decision.
- You can choose an annuity that pays out an income to your spouse or other financial dependant, or select appropriate protection on your annuity through 'value protection' or payment for a guaranteed period. However you can't 'leave the pension pot' to someone else, regardless of when you die.
- You can't guarantee the income rate you'll get tomorrow. With the exception of the transaction period in which you take out an annuity, you will find the rates available on annuities fluctuate all the time.
- It's a guaranteed income – you'll get a specific amount every year until you die.
- It's a product that can increase in value every year in line with inflation if you want it to. So your income will keep up with the rising prices of the things you need to buy. But be mindful of the fact that inflation protection will tend to start your guaranteed income at a much lower level than a product without this protection.
- If you have poor health then you could get a higher level of income, as insurers expect to pay out for a shorter period of time, due to decreased life expectancy.
- The government previously announced plans to launch a secondary annuity market but this has now been cancelled.
Where can I find out more about buying an annuity?
Because you can't switch annuities once you've bought one, it's important to understand what you're buying and make a decision you're confident in for the long-term. We recommend that you seek professional advice before buying an annuity – particularly before you accept any offers from your existing pension provider. Because research shows that up to 48% of customers* who bought a standard annuity with their current pension provider may have been eligible for an enhanced annuity. And according to this research, these customers 'may have suffered actual financial loss' by not having had any qualifying health or lifestyle factors taken into account.
If you don't have a professional financial adviser at the moment, then thepfs.org and unbiased.co.uk are good places to start. They are independent, impartial websites that list financial advisers in your area.
Alternatively, HUB Financial Solutions – part of the Just Group – offers an annuity comparison service that could help you make sense of your options.
*FCA Thematic Review, Annuities Sales Practices, October 2016