The income received from an annuity will depend on:

1. the amount in your pension fund;
2. your age at the time of purchasing an annuity;
3. whether you are male or female as women statistically live longer than men and therefore receive lower annuity rates.
4. the rate offered by the insurance company at the time of purchase of an annuity; and the type of annuity chosen.

The main types of basic annuity are:

The type of annuity chosen will depend on individual circumstances, attitude to risk taking with investments and expectations for the future.

The amount of income that can be provided from a Pension Fund Annuity depends on the Annuity Rates available from the Annuity Providers. Annuity rates are determined by the providers and are dependent upon a number of different factors.  Of particular importance is the size of the pension fund and your age at the time of purchase of an annuity.  Annuity providers are normally very competitive and annuity rates may be changed frequently from week to week.  However, once you have purchased an annuity any amendments to the rates will not affect your income.  Finding the best rates for an annuity can be very time consuming but we should be happy to assist you with Independent Financial Advice.

It is not necessary to purchase an annuity with your existing Pension Policy provider.  Although you may have been making regular payments into a pension policy with an Insurance Company, consideration should still be given as to how much pension income your fund could buy from another Insurance company in comparison to the annuity available from your existing Pension Provider.  This comparison should be made regardless of how successful the existing Insurance Company has been with the investment of your money during the period before your retirement.

Good investment performance within a pension policy before retirement, does not guarantee that any annuity rates offered by the same Insurance Company will be the most competitive in the market place.

The majority of pension plans allow the value of the fund to be used to purchase an annuity from any authorised UK Pension Annuity provider. Any existing pension fund built up within the policy can be passed across to the new annuity provider. This is known as an Open Market Option (sometimes referred to as an OMO).

If your pension policy provides an OMO it will be possible for you to purchase an annuity from the Insurance Company of your choice.  This allows you to obtain the most competitive annuity available at the time of your retirement. Your Independent Financial Adviser can undertake the process of finding the most competitive annuity provider for your needs.

It is possible for you to choose the rate by which your pension annuity will increase each year. These increases are known as pension escalation. There is not normally any requirement to have an escalating annuity, however it should be remembered that without an increasing annuity the spending power of your pension will reduce over the term of your retirement.  Many people want a retirement an index linked income that rises in line with the changes in the Retail Prices Index (RPI).

Increases to a pension annuity are usually applied annually on the anniversary of the date of first purchase from the Insurance Company or other provider.  A decision must be made to include pension escalation at the time of purchase of an annuity, as it cannot be added at a later point. The level of increase you elect to build in to your annuity will affect the starting level of the income you receive.

The table below shows the effect on the starting level of pension by the inclusion of Pension Escalation at a rate of 3% each year. In this particular instance the reduction in the starting pension is more than 24%. The figures shown below assume that there would be no increases in the level of pension annuities payable.  All figures quoted are gross before deduction of Income Tax and are for illustrative purposes only.

Under some types of pension plan there are rules regarding the maximum rates of escalation that may be provided and also in some cases there are minimum levels that are required.  If elected to be ‘contracted out’ of the Government’s State Earnings Related Pension or state second pension scheme your pension has been built up from rebates of National Insurance contributions Normally any pensions payable from Contracted Out Pension plans must escalate.

The rate of escalation depends on tax years in which the National Insurance rebates were passed to your pension plan.  Initially all rebates had to provide for pensions that escalated at a rate of 3% per annum. However this changed for rebates received after the 6th of April 1997, from that date rebates must be used to provide a pension that escalates in line with the retail prices index but subject to a ceiling of 5% per annum (this rate of escalation is known as Limited Price Indexation or LPI)

A pension annuity is payable throughout the remainder of the lifetime of an annuity holder from the time of first purchase from the annuity provider.  Therefore life expectancy has a great influence on the starting level of an annuity.  As an example a 60-year-old person would receive a lower annuity than a 70 year old with the same sized pension fund because the younger person has a longer life expectancy.

The effects of life expectancy can also be witnessed in the difference in an annuity payable to a woman compared to man of the same age with the same sized fund. Statistically women live longer than men and this fact is evidenced in most annuities.

Unless a joint life annuity is chosen, a Pension Annuity ceases upon death and none of the purchase money is returned to your estate.  Therefore the majority of people seek an annuity provider who will provide some form of guarantee.  This guarantee provides a minimum period during which the pension will be payable. This period starts from the commencement of the annuity payments and normally is  guaranteed for a period of five years, although under some company pension schemes this period could be as long as ten years.

In the event of death during the guarantee period then the next of kin will continue to receive the annuity payments until the end of the guarantee period.  Alternatively the provider may pay a lump sum in lieu of future payments, the method they use would be determined at outset of the annuity.  You should ensure you are aware of the type of guarantee, if any, that you are buying when your annuity is purchased, as it cannot be changed once the payments commence.

One of the major attractions of all ISA plans is that they offer you excellent access to your money. You can withdraw your money at any time without losing any of the tax relief that has been granted to your plan.

Some ISA plans may run for a fixed period or require you to give notice of withdrawal. With these particular plans you could lose some interest or bonuses should you elect to withdraw your money early. You should always read the terms of your ISA plan carefully and pay particular attention to any conditions applying to withdrawing of your money.

Although the pension annuity payable will cease upon death, it is possible for benefits to continue to for a spouse or partner after your death.  This is a joint life annuity.  The income payable to your surviving partner will continue for the rest of that person’s life. A partner need not be a wife or husband; neither must they be of the same sex.  If the person is not your spouse then it will be necessary to show that they are dependent on you financially. This proof is required at the time the partner’s pension is to commence.

If you are not married it would be wise to contact your adviser before deciding to purchase an annuity for a partner.  This will allow a check to be made that your partner satisfies the conditions applicable to financial dependants and that the benefit you have purchased could actually be provided to them after your death.

Some annuity providers call a Partner’s Annuity either a Spouses Annuity or a Reversionary Annuity which are in effect the same. If you do decide to include a Partner’s Annuity then as with annuity escalation, the starting level of your own annuity will be reduced. You may choose any level of partner’s annuity you desire, however it cannot exceed the level of annuity payable to you during your lifetime.

You may decide to set any partner’s pension at half (50%) of the level paid to you during your life or you may prefer that it would equal two thirds (66.6%) of the level paid to you. The decision is yours but please note that there are rules about the maximum benefit any one person can receive.

The table below shows the impact, on the starting level of your pension annuity, if you include a 50% partner’s annuity alongside an increasing annuity of 3% each year.

You are allowed to provide a pension annuity, that becomes payable after your death, for one or more of your children, either natural or adopted.  They must be under the age of 18 or, if older in full time education at the time of your death. Once a child passes age 18 then the pension annuity can only continue whilst they continue in full time education. In cases of a child with special needs the pension annuity payable to them, can be paid throughout the remainder of their life.

Consideration needs to be given as to whether the reduction in the starting level of an annuity caused by the inclusion of escalation or a Partner’s pension would actually be to an advantage in the long term. If a partner has their own pension annuity, or other form of income and this is sufficient for them to live a comfortable life, then there may be no need to include a Partner’s Pension within your own annuity.  If your life expectancy is shortened, for instance due to ill health, or you are older, it may transpire that the inclusion of escalation is not in your interest.

If you require any assistance on deciding whether or not to include either escalation or a partner’s pension please contact us for advice.

An annuity is a long term income commitment and any Pension Fund used to buy such an annuity no longer belongs to you.  Therefore it will not be returned after your death and should the investment markets rise sharply your income level would not be changed.  Of course the same is true if the investment markets fell after you had purchased an annuity, namely a fall in market values has no effect on your income.