Our advisors will help you compare annuity quotes, determine whether an annuity is the most suitable route, and look at what benefits you should consider to maximise your retirement.
Advice Rooms was created as a space for individuals to receive financial advice regarding any area of their financial and/or retirement planning. Today’s world makes everything seem impossibly complex, with companies offering a minefield of options when planning one’s future finances.
What is an annuity?
An annuity is a guaranteed income that you purchase. Once paid, it can’t be changed and is payable for the rest of your life, no matter how long you live.
How do I know if an annuity is the best option for me?
Several factors must be considered when determining if an annuity is right for you. These include your current financial situation, your retirement aspirations, and your health and are taken into account when using an annuity calculator.
How does an annuity work?
Additionally, it’s essential to understand the different types of annuities and their features, such as the annuity’s guarantee, payout options, and any fees or charges associated with the product. We can help you compare annuity quotes to help you see your options
We recommend that you speak to one of our advisors to evaluate whether an annuity would be a suitable addition to your overall circumstances.
An annuity may be suitable for you if you want:
- A regular income is payable for your lifetime. With the option for it to increase yearly, either by a fixed percentage or in line with the Retail Price Index (RPI), to help protect it from the effect of inflation.
- The option for your dependant to receive a regular income if you die before they do.
- To avoid your pension pot being subject to investment risk.
- A product that could pay more income if you have certain lifestyle risks or medical conditions.
An annuity may NOT be suitable for you if you want:
- To withdraw cash amounts from your pension pot as and when you choose.
- Flexibility to change any of the options you initially choose.
- Your income to vary depending on investment conditions.
- To build up a pension pot by making further contributions.
How long do I need an annuity for?
When understanding how long you need an annuity, there are several vital factors to consider, including your age, life expectancy, current and future expenses, and inflation.
All these factors should be considered when determining how long you will need an annuity. It is essential to consult with a financial advisor to develop a retirement plan that considers all these factors and to ensure that you have enough money to last throughout your retirement.
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How much income will I receive?
The income you’ll receive will also depend on several factors, including age, health, and the amount of money you have available.
It is important to understand that you can’t change your mind once an annuity has been set up. We always recommend that you speak to a financial adviser who will help you understand your options and help you compare the market.”
Can my health affect the annuity rate I receive?
Yes, your health can affect the annuity you receive. Some annuity providers may offer “enhanced annuities” to individuals who have certain health conditions or lifestyle factors that may reduce their life expectancy. These individuals may be able to receive a higher income than someone who is in good health because the insurance company is taking on more risk by providing an income over a shorter period.
Examples of health conditions or lifestyle factors that may qualify for an enhanced annuity include:
- Smoking
- High blood pressure
- Diabetes
- Obesity
- A history of heart disease or cancer
When purchasing an annuity, you may be asked to provide information about your health and lifestyle. This information will be used to determine if you qualify for an enhanced annuity and what rate you will be offered. It’s important to note that not all providers offer enhanced annuities, and the criteria for enhanced annuities may vary among providers.
Also, providing incorrect or false information when applying for an enhanced annuity can have serious consequences. That’s why it is vital to consult with a financial advisor to evaluate whether an enhanced annuity would be a suitable addition to your overall investment portfolio.
Case study
Mary is a 65-year-old woman* who is nearing retirement and wants to secure a steady income for her retirement. She has a savings of £150,000.
However, Mary is a smoker and has a history of high blood pressure. These factors qualify her for an enhanced annuity. After consulting with a financial advisor, Mary decides to purchase a single-life annuity with a guaranteed minimum payment period of 10 years. The provider offers her an enhanced rate because of her health status.
The single-life annuity provides Mary with an income of £11,000 per year, paid out monthly. This is higher than the standard rate offered to individuals in good health because she was provided with an enhanced rate because of her smoking and high blood pressure.
If Mary passes away after ten years, the income payments will stop, and no lump sum will be paid to her beneficiaries.
* This is an example case study intended for demonstration purposes only.
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Choosing a guaranteed minimum payment period
Firstly, a guaranteed income payment period in annuity terms is the length of time you choose to protect a payment to your chosen beneficiary on your death.
When you purchase an annuity, it will provide you with a steady income for the rest of your life. However, if you choose a guaranteed minimum payment period, your income will continue to be paid when you pass away. The guaranteed minimum payment period begins on the start date of your annuity, and you can usually choose a period of up to 30 years.
Keep in mind that the maximum age at the end of the period is 100, so if you’re over 70, your choice of period will be shorter than 30 years.
If you pass away during the guaranteed minimum payment period, any remaining income payments will go to the person you nominated as a beneficiary or to your estate. It’s important to note that selecting a guaranteed minimum payment period will decrease the amount of income you receive. The longer the period you choose, the lower your income will be.
Case study
John is a 60-year-old man* who is nearing retirement and wants to secure a steady income for his retirement. He has savings of £200,000, and after consulting with a financial advisor, he decides to purchase a single-life annuity with a guaranteed minimum payment period of ten years.
He also chooses to add a provision for his partner, Jane wants to receive an income when he passes away. This is known as a “partnership annuity” option. This will ensure that Jane will continue to receive an income even after John’s death, although the income will be lower than what John was receiving.
The single-life annuity provides John with a monthly income of £12,000 per year. The cost of the guaranteed minimum payment period and partnership annuity option reduces his income slightly, but he is comfortable with this trade-off for the added security it provides for Jane.
If John passes away after ten years, Jane will continue to receive an income of £7,500 per year for the rest of her life.
* This is an example case study intended for demonstration purposes only.
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Choosing a single or joint life policy.
When choosing between a single-life or joint-life annuity, there are several factors to consider.
What is a single-life annuity?
This single-life annuity provides an income for one person, typically the person who purchased the annuity. If the person who purchased the annuity passes away, the income payments will stop, and no lump sum will be paid to
the beneficiaries.
What is a joint-life annuity?
A What is a joint-life annuity?joint-life annuity provides income for two people, typically a married couple. If one spouse passes away, the income payments will continue for the remaining spouse.
If both pass away within the guaranteed minimum payment period, a lump sum will be paid to the beneficiaries.
When choosing between a single-life annuity or joint-life annuity, it’s essential to consider the following:
- Your current marital status and whether you plan to get married or remarried in the future.
- Your life expectancy and that of your partner.
- Your beneficiaries and who you would like to provide for after your death.
Therefore, if you’re looking to maximise income, a single-life annuity may be the better option. In general, if you’re married or have a partner, a joint-life annuity can be a good choice because it provides an income for both of you and ensures that your partner will be taken care of in case of your death. If you’re single or don’t have a partner, a single-life annuity might be more appropriate.
Case study
James and Mary are a married couple in their 60s. They have a combined savings of £250,000 and are looking to secure a steady income for their retirement. After consulting with a financial advisor, they decide to purchase a joint-life annuity.
They choose a level annuity with a guaranteed minimum payment period of 10 years. If either of them passes away within ten years, the remaining spouse will continue to receive the income payments. The joint-life annuity provides them with an income of £13,500 per year, which is paid monthly.
The cost of the guaranteed minimum payment period and inflation-link option slightly reduces their income, but they are comfortable with this trade-off because of the added security it provides.
If either of them passes away after ten years, the remaining spouse will continue to receive the income payments for the rest of their lives. If both pass away within the 10-year guaranteed period, their beneficiaries will receive a lump sum of £225,000, which is the remaining value of their annuity fund after the income payments have been made.
Other areas to consider
Several factors must be considered, all of which will affect the level of your income.
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Inflation
Inflation is another crucial factor to consider when choosing an annuity. As prices increase over time, your money’s buying power is likely to be much lower in the future.
To offset the effect of inflation, you can choose to increase your payments year on year. Annual increases in payment will affect the rate of income you receive, so we advise that you compare quotes to understand the effect of your decision over time.
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Payment Frequency
When you purchase an annuity, you can choose the payment frequency you wish to receive. You can also choose to be paid in advance or in arrears. Your decisions will affect the rate you receive. Your payment will be higher if you choose ‘in arrears’ over ‘in advance’.
We always recommend speaking to one of our advisors when deciding which is best for you. Because of fluctuating annuity rates, rates change daily; in addition to your circumstance and the options you choose, interest rates and gilt yields all play a part in what rates are offered at any time.
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What happens to an annuity when you die?
The death benefit of an annuity is chosen when you purchase a policy and is often called a guaranteed period. The longer the period you guarantee your money will be handed down on your death, the lower the income will be offered. When speaking to a financial adviser, remember to discuss your requirements to support others when you do.
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Your options
Each option comes with an associated cost that will impact the initial level of your income. The more options you choose, the more significant the impact on your income will be. You can request multiple illustrations from an adviser to help you understand the effect of different options. This will allow you to compare the impact of the different available options.
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Increasing annuity payments
Most annuity providers give the option of an increasing annuity, providing a way to keep up with inflation and maintain a consistent standard of living in retirement. Please remember that this will affect the amount of income you receive.
Compare annuity quotes
It is essential to compare annuity quotes because different annuities can have different features, and the income they provide can vary greatly. By comparing quotes from different providers, you can find the annuity that best meets your needs and offers the highest income.
Additionally, you can compare the different annuity options that may be available, like the length of the guarantee, the level of protection period, and how the income is paid out.
We recommend you speak to one of our advisors to determine which annuity offers the best value for your money. If you shop around and compare annuity quotes, you can decide which annuity is right for you. Choosing the right policy can make a big difference towards your future.
What to do next
The information throughout this guide helps to give an understanding of what you need to consider when choosing an annuity. However, everyone has a unique set of circumstances so please speak to one of our advisors to discuss your plans and understand the best way to create your personalised strategy.
When discussing your plans, your adviser will:
- Discuss your circumstances to fully understand your needs moving forward
- Help define your income needs – especially your essential expenditure, it is common to use guaranteed income to cover the basics
- Explain the impact of inflation – and how costs rise over time
- Discuss the need for Tax-Free Cash – and check whether you need to take any of your pension funds as cash, this could be sensible if the money is used to pay off existing debts
- Collect your health and lifestyle information – this can have a significant impact on the guaranteed income available to you in retirement
- Discuss long-term care options – for you or your dependent
- Discuss leaving a legacy – is your intention to leave some of your assets to your children or others? It may also be necessary to discuss your dependant’s income and how will those who are important to you be catered for after you die
- Research the market – and explore the options that will help you achieve aspirations in retirement
- Produce a suitability advice report – to suggest a suitable strategy for moving forward. The report will include retirement projections and suitable products and investments while identifying other requirements that must be considered. All of this will be discussed with you in detail so that you fully understand the recommendations that have been made.
Would you like to speak to someone regarding your own situation?
Everyone has a unique set of circumstances so please speak to one of our advisors to discuss your plans and understand the best way to create your personalised strategy.
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