Annuities provide you with a guaranteed income for the rest of your life. They have been widespread for many generations of retirees, for the simple reason that they provide one of the most reliable incomes when you stop working. And because of the way they're structured, they're guaranteed to go on for as long as you do.
What is a standard or conventional annuity?
They may be known as conventional annuities, lifetime annuities, or standard annuities, but they are all a financial product that will give you a guaranteed retirement income for life in exchange for all or some of your pension pot. You only need a minimum of £2,000 to take out an annuity, and the amount you receive will be based on a number of factors, including the current price of Government Bonds (gilts), your health and lifestyle, your age, and even your postcode.
Why are they a good idea?
Annuities let you plan your finances with confidence, knowing that you'll have a regular income for the rest of your life. There's no investment risk with a standard annuity, but there are some risks, which we explain a little further on.
Who are these annuities good for?
If you want the peace of mind of having a regular income, then annuities are probably your best bet in retirement. You won't outlive the product – it will always pay you an agreed amount of money at regular intervals (such as monthly or quarterly) that you agree when you buy the product.
There must be advantages and disadvantages, though?
Yes, and it's important to weigh them up so that you can make a well-informed decision.
- You will know how much money you'll receive regularly for the rest of your life.
- You can still choose to access some of your pension pot in cash before you commit the remainder to purchasing an annuity.
- You can buy an annuity that will give you an income linked to inflation. It will be a lower amount, but will go up over time.
- You can choose to provide for your spouse or dependents, but this will mean accepting a lower income.
- With standard annuities, the income you'll get will be unaffected by rises and falls in the stock market.
- You can buy an annuity with any pension pot you have that's over £2,000.
- You can choose to protect the value of your annuity from the possibility of dying early through something known as 'value protection'.
- You can choose to add (at outset) a guaranteed period of income payment to your dependents, in the event that you die early. This could be for up to 30 years.
- Once you've bought an annuity, you can't trade it or swap it for another product.
- If you die relatively soon after buying the annuity, the funds left will be kept by the provider unless you have protected against this happening.
- Annuity rates change all the time and, depending on your pension provider's rates, they may appear to be relatively poor value. This is why it's important to shop around for the best deal.
OK, what should I do next?
Alternatively, HUB Financial Solutions, part of the Just Group, offers an annuity comparison service that could help you make sense of your options.