What is an annuity?
An annuity is essentially a type of insurance product that, in exchange for some or all of your pension savings, guarantees to pay you an income for the rest of your life.
There are a number of types of annuity products available, as well as a number of features and benefits that you can choose when taking one out, so it's important to think about what you might want from an annuity carefully.
Shopping around for the best level of income, as well as ensuring that any company takes into consideration how healthy (or not) you are is also very important. Your health and lifestyle can make a significant difference to the amount you could receive in retirement.
At Just, we offer individually underwritten annuities.
But to help you understand all of the options we've included information about other, different types of annuities too. And we've also included some helpful hints about what you need to know if you would like a guaranteed income for life.
What types of annuity are there?
A pension annuity gives you a guaranteed regular income for as long as you live in exchange for your pension savings. The amount that you are regularly paid will depend on several factors, and there are many different types of pension annuity available, so be sure to pick the right one for your circumstances.
Overall, there are three main types of pension annuities: lifetime annuities, investment-linked annuities and fixed-term annuities.
What is a lifetime annuity?
A lifetime annuity is a guaranteed income for the rest of your life – and for your spouse or dependants after your death if you include them when you take out an annuity. Once you’ve purchased a lifetime annuity, there is no risk associated with investment performance, and lifetime annuities come in two 'flavours' – standard annuities and enhanced annuities. Enhanced annuities may offer a higher annuity rate than a standard annuity, if you meet certain health and lifestyle criteria which could shorten your life expectancy.
What is an Investment Linked Annuity?
This is a type of pension annuity where part of the income is guaranteed and part is linked to investment performance. If markets perform well you receive higher levels of income, however, if markets are falling you may only receive the minimum guaranteed amount. There is an investment risk with this type of pension annuity.
What is a Fixed Term Annuity?
Fixed Term Annuities pay an income for a set period or until you die, if earlier. They give you an opportunity to keep your options open in case your circumstances change later in retirement.
In return for investing in a pension fund from an existing pension scheme, a fixed term annuity pays a fixed level income for a specific period of time – typically about five years. After that point in time, you can usually choose to reinvest remaining funds in an alternative product.
How do I buy an annuity?
Buying an annuity is something you need to get right because it's a one-off decision. In other words, you can't swap annuity providers, once you've purchased a product. But as long as you're well-prepared, it can be relatively simple. And the good news is that there are a few simple steps you can take to ensure you get it right first time.
Stage 1 – Make sure you’re well informed
Gather as much information as you can about the pension or pensions you have. Get up-to-date statements, details on your proposed retirement dates and estimates of what your current providers would offer. With any quote you receive you will also get an 'Information prompt'. This will contain some important information that you should consider before deciding to go ahead - such as if you could receive a better income from another provider.
Stage 2 – Take good advice
Speak to a professional adviser about your financial options for the future. If you don’t have access to an adviser, or haven’t used one yet, start by looking at thepfs.org and unbiased.co.uk. These are impartial, independent websites that list advisers in and around your area.
Stage 3 – Talk to annuity providers
A comprehensive study by the Financial Conduct Authority in 2014 found that 60% of consumers were not switching providers when they bought an annuity. This was despite the fact that around 80% of these consumers could have got a better deal by shopping around on the open market*.
But it's worth bearing in mind that this does also means that 20% of people could have made a good choice by sticking with the offer on the table. It's always worth shopping around for a better deal while you are talking to the company that's been looking after your money for many years, to find out if they have other annuity products you could consider.
Stage 4 – Choose your options
Having consulted a professional adviser, and gained an understanding of the products you’re being offered, it’s important to make careful decisions about your annuity options (things like making provisions for your spouse or partner or linking your income to inflation).
Stage 5 - Make a decision
Whether it’s your current provider or not, the company providing you with an annuity will take care of the administration involved: transferring funds out of your pension in exchange for a product that will pay you a lifetime of income.
Stage 6 – Receive your income
You’ll have some flexibility regarding the date on which you want to receive your income. It may make more sense to decide on a date that doesn't require you to change your bills and regular outgoings.
Can’t I buy an annuity on my own?
You can, of course, choose to buy an annuity without taking professional advice, and there are many helpful resources which you can use, such as the Money Helper, to help you understand how to make the right decision. It's also worth bearing in mind that the wrong decision could be costly, and that good advice could secure you a higher income for the rest of your life.
HUB Financial Solutions - part of the Just Group - offers an online annuity comparison service that could help you make sense of your options.
We provide a guaranteed income for life solution using an individually underwritten annuity. We may be able to offer an increased level of income by taking into account your personal, health and lifestyle information.
We believe everyone should receive a personalised level of income as everyone's circumstances are different. We would always encourage those seeking to access their pension savings to seek professional advice from a financial adviser before making any decisions.
Factors that can impact the level of income we can offer are:
- body mass index
- alcohol intake
- high blood pressure or cholesterol
- prescription medication
- recognised medical conditions
The annuity options Just provide
Our products can be tailored to your needs by choosing from a range of benefits. These options provide greater flexibility or protection for your regular income. Whatever options you choose, your income will be guaranteed for life.
It's really important that you take time to consider the options you select for your annuity, as this will ensure the product you end up with is the right one for you. The options you can choose from include:
- How much tax-free cash (usually up to 25%) you wish to take from your pension savings. You can then purchase your annuity with some or all of the remainder of your pension savings.
- How frequently you would like your income to be paid and when you would like it to start.
- Guarantee periods of up to 30 years; if you die during this time, your income continues to your loved ones, for the remainder of your chosen period.
- Value protection to provide a lump sum if you haven't received the full value of your pension, in the event of your death.
- Protection from the effects of inflation.
- Whether you wish your income to continue to provide for your loved ones when you die.
Just Secure Lifetime Income
Since the pension freedoms were introduced, there’s been a need for a truly innovative and value-for-money retirement income solution.
Secure Lifetime Income (SLI) was introduced to address this need. It can give you peace of mind, with a guaranteed income for life within a Self-Invested Personal Pension (SIPP). It could help cover your regular outgoings for the rest of your life, leaving you to choose how to invest your other funds within your SIPP for potential growth.
The Secure Lifetime Income comes with a number of benefits, including:
A lump sum death benefit
It includes a lump sum death benefit that starts at 75% of the purchase price and reduces monthly at twice the rate of income paid until it reaches zero. The death benefit is available for an initial set period which is determined by the level of income you receive. This provides valuable protection for your family whilst the death benefit applies.
SLI is paid directly into the SIPP. This gives you the flexibility to decide how much income you take out and when, to meet your needs and help you manage tax.
A unique cash-in value
It includes a safety-net, cash-in feature, during the death benefit period. This allows you to cash in your SLI if your circumstances change significantly and you need a lump sum during this period.
The cash in value starts at 75% of the purchase price (the same as the death benefit) and reduces at the twice the rate of income paid until it reaches zero. The cash in value will never be more than the death benefit at the time you take it, but could be lower depending on market conditions.
A simple solution
It also offers simplicity, as SLI is held within your SIPP making it easier to manage your retirement income with a single P60 and portfolio view.
Am I eligible for Secure Lifetime Income?
Secure Lifetime Income is available to people aged 55 to 90 who have funds held within a SIPP in flexi-access drawdown. Please be aware that Secure Lifetime Income is currently only available on selected SIPP platforms.
How can I purchase a Just annuity or Secure Lifetime Income product?
We don't offer our guaranteed income for life solutions directly, but you can purchase them through a professional financial adviser or intermediary. You'll find professional financial advisers who are local to you on thepfs.org and unbiased.co.uk.
Alternatively, if you're looking to purchase a lifetime annuity, HUB Financial Solutions - part of Just Group - offers a lifetime annuity comparison service, that could help you make sense of this option.
*FCA Thematic Review, Annuities Sales Practices, October 2016