What you need to know when purchasing an Annuity


An Annuity can be an important product to fund your retirement. But fewer people are choosing to purchase an Annuity following the introduction of Pension Freedoms.

An Annuity is a product you purchase to provide a retirement income, typically using your pension savings. It offers a guaranteed income for either a defined period of time or, more commonly, for the rest of your life. Annuities can provide certainty when you plan your retirement finances.

Following the introduction of Pension Freedoms in 2015, sales of Annuities dipped. It’s a trend that reflects the greater number of options open to retirees. Figures from the Financial Conduct Authority (FCA) revealed that 33,975 Annuity sales were made between October 2017 and March 2018. This compares to the 90,504 pensions entering drawdown (taking an income) for the first time and 137,777 full cash withdrawals.

However, just 28% of Annuity sales are made after seeking financial advice. An Annuity can provide income security through retirement but there are some key things to know before proceeding.

1. There’s more than one type of Annuity

Before you buy an Annuity, you need to decide on the type you want. Once an Annuity has been agreed it’s often impossible to change.

Most retirees opt for a Lifetime Annuity, which will provide a guaranteed income for the rest of your life. However, temporary annuities, which cover a fixed term, and investment-linked Annuities, where part of the income is dependent on investment performance, are also options.

You can also choose to purchase an Annuity as an individual or for two or more people. A Joint or Survivor Annuity may provide an income for partners and dependents should you die before them.

2. You don’t have to use all your pension to buy an Annuity

Pension Freedoms have provided you with more flexibility when taking a retirement income. If you decide you want to purchase an Annuity, you don’t have to use all your savings to do so.

You can still take advantage of the option to take up to 25% of your pension as a lump sum tax-free. You may also choose to leave a portion of your pension invested, supplementing the guaranteed income an Annuity can provide.

3. An Annuity can be linked to inflation

When you’re searching for an Annuity product, this is a key area to think about. Do you want the income paid out to you to be linked to inflation?

Choosing ‘yes’ will probably mean that the rate you’re offered is reduced. However, if you answer ‘no’ your spending power is likely to be eroded gradually over time. Annual inflation rates of 2-3% might not sound a lot but when you stretch this over a 30-year retirement it can be significant.

4. The income from an Annuity may be liable for Income Tax

The money paid out through an Annuity will count as an income. As a result, it may be liable for Income Tax. If your total income is above the Personal Allowance, currently set at £11,850 and rising to £12,500 in April 2019, you should factor in paying tax. The amount of tax you pay will depend on your total income and which tax band you fall into.

5. Annuity rates can vary

The Annuity rate you’re offered will be dependent on your health and lifestyle, as well as other factors. How providers calculate this can vary significantly, as a result, so do the rates offered.

You should take some time to shop around for the best deal and speak to a financial planner before you make a purchase.

6. Disclosing medical conditions can mean accessing higher rates

Three-quarters of over 55s believe that disclosing a medical condition will reduce the Annuity rate they’re offered, according to Legal and General. In fact, the opposite is true.

Pre-existing medical conditions and some lifestyle choices, such as smoking, can lead to more money being offered if life expectancy may be shortened as a result. Disclosing full details to your financial adviser or Annuity provider can help you get the most out of your pension savings.

7. Your income will be protected by the Financial Services Compensation Scheme (FSCS)

Following pension scandals making headlines, it’s common to be worried about how secure your retirement income would be should the provider collapse.

When you’re drawing a set retirement income from an Annuity, the FSCS provides 100% protection. This can help give you peace of mind that you’ll continue to receive the expected income even if the insurance firm is unable to meet its obligations. In contrast, if your pension is placed directly in investments, you’ll only be protected up to £50,000 per investment provider.

If you’re planning your retirement finances, please contact us. We’ll help you understand the level of income you can expect in retirement and the best way to access it with your goals and needs in mind, whether this an Annuity or another retirement strategy.

Please note: A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.