Annuity

If you wish to explore the annuity option, you will be made aware of the factors which determine the level of income you will receive. These include the annuity rate, the amount of your pension savings and your life expectancy. Your habits and where you live can even affect the level of income that you receive.

There are options that you can add to your secure pension and you have control of which of these options are purchased. Each option will reduce the level of income that you receive. Some of these options are described below.

• Protection from price increases: You can protect the spending power of an annuity by adding annual increases on to the income you receive. These can be fixed by increasing at a rate such as 3% per annum, or they can be linked to an index such as Retail Prices.
• Pension Value Protection: On purchase of a secure income, one of the perceived disadvantages is that if you die shortly after purchase that your pension savings would be ‘wasted’. Value protection can return your original purchase price less the payments already received on death.
• Minimum Payment Periods: Guarantees can be added to the annuity so that the payments will be paid for a minimum period of time so you could add a 10 year guarantee onto the annuity which will mean that it’s full value will be paid for at least 10 years.
• Survivor’s Pension: If you buy an annuity in your name alone, it will cease on death if the minimum payment period has passed. You can protect a spouse or partner by adding them onto the annuity which will ensure that the income stream continues until the death of the second party to the annuity.

Advantages of purchasing a secure income

• You will receive a secure income for your lifetime.
• You will still be able to take a lump sum at outset if this is required.
• All the charges involved in purchasing an annuity are paid up front and included in the calculation of the annuity rate. You will therefore not need to pay any further charges after the income starts.
• This is a very straightforward plan. You exchange a lump sum for an income which will continue to be paid in the terms agreed at outset.

Disadvantages Of Buying An Annuity

• This is a one off irreversible process. If your circumstances you are locked into the annuity and cannot change it in any way.
• Any of the additional options you want must be selected at outset, they cannot be amended after the income starts.
• If you have not selected an annual increase or if this is a fixed increase, the annuity may not maintain it’s spending power.
• To look again at the disadvantages of transferring from a secure income scheme please click here.