An annuity is a regular income paid in exchange for a lump sum, usually the result of years of investing in an approved, tax-free pension scheme. There are different types. The vast majority of annuities are conventional and pay a risk-free income that is guaranteed for life. The amount you receive will depend on your age, whether you are male or female, the size of your pension fund and, in some circumstances, the state of your health.<\/p>\n
Your pension company may want you to choose its annuity offering, but the law says you don\u2019t have to. Everyone has the right to use the \u2018Open Market Option\u2019, to shop around and choose the annuity that best suits their needs. There can often be a significant difference between the highest and lowest annuity rates available.<\/p>\n
Some insurance companies will pay a higher income if you have certain medical conditions. These specialist insurers use this to your advantage and will pay you a higher income because they calculate that, on average, your income should be paid out for a shorter period of time.<\/p>\n
Some older pension policies have special guarantees that mean they will pay a much higher rate than is usual. Guaranteed Annuity Rates (GARs) could result in an income twice or even three times as high as policies without a GAR.<\/p>\n
A conventional annuity is a contract whereby the insurance company agrees to pay you a guaranteed income either for a specific period or for the rest of your life in return for a capital sum. The capital is non-returnable and hence the income paid is relatively high.<\/p>\n
Income paid is based on your age, for example, the mortality factor, and interest rates on long-term gilts, and income is paid annually, half yearly, quarterly or monthly.<\/p>\n
Annuities can be on one life or two. If they are on two lives, the annuity will normally continue until the death of the second life. And if the annuitant dies early, some or all of the capital is lost. Capital protected annuities return the balance of the capital on early death.<\/p>\n
Payments from pension annuities are taxed as income.\u00a0Purchased life annuities have a capital and an interest element; the capital element is tax-free, the interest element is taxable.<\/p>\n
Types of annuity include the following:<\/p>\n
Immediate annuity<\/strong> Guaranteed annuity<\/strong> Compulsory purchase<\/strong> Deferred annuities<\/strong> Temporary annuity<\/strong> Level annuity<\/strong> Increasing or escalating annuity<\/strong> Some life offices now offer an annuity where the performance is linked to some extent to either a unit-linked or with-profits fund to give exposure to equities and hopefully increase returns.<\/p>\n Relaxing the law requiring everyone to buy an annuity The aim is to revolutionise investor attitudes towards pensions and encourage greater retirement saving, so that we take greater responsibility for our financial futures. It will also mean that everyone who invests in a pension can retain control of their pension assets right through until the day they die.<\/p>\n The proposed law change is aimed at giving individuals greater flexibility over how they use the savings they have accumulated. This would see the replacement of some pension tax rules with a new system that gives people greater freedom and choice.<\/p>\n This consultation is a revolutionary change and also includes tax breaks available on pensions. It is expected that investors will have the choice of buying an annuity, as at present, and in addition they will have a choice of two drawdown options to select from. For those investors with insufficient income to satisfy the \u2018Minimum Income Requirement\u2019, there will be the option of a capped drawdown. This capped drawdown will have fairly conservative income limits, designed to ensure that investors never run out of money.<\/p>\n Those investors who do not want to take the high risk involved with drawdown will still be able to convert their pension fund into an annuity, which will pay a secure taxable income for life.<\/p>\n The death benefit rules are changing and becoming simpler and the government has confirmed that it will be ending the Alternatively Secured Pension.<\/p>\n","protected":false},"excerpt":{"rendered":" Taking greater responsibility for your financial future An annuity is a regular income paid in exchange for a lump sum, usually the result of years of investing in an approved, tax-free pension scheme. There are different types. The vast majority of annuities are conventional and pay a risk-free income that is guaranteed for life. The… Read more »<\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[4],"tags":[],"_links":{"self":[{"href":"https:\/\/www.suretyfp.com\/wordpress\/index.php?rest_route=\/wp\/v2\/posts\/1107"}],"collection":[{"href":"https:\/\/www.suretyfp.com\/wordpress\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.suretyfp.com\/wordpress\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.suretyfp.com\/wordpress\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.suretyfp.com\/wordpress\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=1107"}],"version-history":[{"count":0,"href":"https:\/\/www.suretyfp.com\/wordpress\/index.php?rest_route=\/wp\/v2\/posts\/1107\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.suretyfp.com\/wordpress\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=1107"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.suretyfp.com\/wordpress\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=1107"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.suretyfp.com\/wordpress\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=1107"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}
\nThe purchase price is paid to the insurance company and the income starts immediately and is paid for the lifetime of the annuitant.<\/p>\n
\nIncome is paid for the annuitant\u2019s life, but in the event of early death within a guaranteed period, say five or ten years, the income is paid for the balance of the guaranteed period to the beneficiaries.<\/p>\n
\nAlso known as open market option annuities, these are bought with the proceeds of pension funds. A fund from an occupational scheme or buy-out (S32) policy will buy a compulsory purchase annuity.\u00a0A fund from a retirement annuity or personal pension will buy an open market option annuity, an opportunity to move the fund to a provider offering higher annuity rates.<\/p>\n
\nA single payment or regular payments are made to an insurance company, but payment of the income does not start for some months or years.<\/p>\n
\nA lump sum payment is made to the insurance company and income starts immediately, but it is only for a limited period, say five years. Payments finish at the end of the fixed period or on earlier death.<\/p>\n
\nThe income is level at all times and does not keep pace with inflation.<\/p>\n
\nThe annuitant selects a rate of increase and the income will rise each year by the chosen percentage.<\/p>\n
\nThe Treasury has announced that it is looking to relax the law requiring everyone to buy an annuity by age 75.\u00a0This follows the coalition government\u2019s decision in the 2010 emergency Budget to end compulsory annuitisation by April 2011.<\/p>\n
\nInvestors who can demonstrate that they have secured a minimum level of income will have the choice of taking money from a flexible drawdown plan at will. This means receiving it all back in one go as a cash sum if required. Income withdrawals will be subject to income tax.<\/p>\n