The Annuity is bought with a lump sum such as your pension fund. It is a useful way to ensure a comfortable retirement as an annuity guarantees you an income no matter how long you live. This income can be paid to you in monthly, quarterly, half-yearly or yearly instalments – whichever suits you best.
Once you have purchased your annuity it cannot be exchanged.
This means that you need to carefully consider your options before deciding which annuity to take out. When buying an annuity you don’t have to purchase it from your pension provider.
Many financial advisors will advise you never to take the first annuity you are offered as it is very likely you will find a better one before you decide to purchase. It is important that you search the market carefully and you are not hasty when choosing an annuity, as you will have the same one for the rest of your life.
An annuity converts your pension fund or SIPP that you’ve been building up over the course of your working life into a regular income in retirement. As it is guaranteed for life and cannot reduce, an annuity is unaffected by fluctuations in interest rates or markets and offers you a stable, secure income for the rest of your life.
Annuities offer a number of options which mean you can choose whether to protect the value of your annuity, protect the buying power of your income, or provide an income for a spouse or loved one after your death.
You can choose to receive your income yearly, half-yearly, quarterly or monthly.
You can also choose to have your income paid in advance or arrears. This means your first payment will either be on the first day the annuity provider can pay it following setting up your annuity, or at the end of your chosen payment period (e.g. one month after your annuity is set up). If you choose payments in arrears, your lifetime income will be higher than if you choose in advance.
Level or escalating income: You can choose between an annuity that will pay the same annual income every year for the rest of your life, and an annuity that will pay increasing amounts each year to protect the buying power of your income against the effects of inflation over time.
Level annuities have a higher initial income than escalating annuities but the real buying power of a level annuity falls with rising prices. Choosing an escalating lifetime annuity that pays a lower income initially but increases each year can help protect your income from rising prices