If you are over the age of 55, you can use your pension pot in exchange for a regular, monthly income during your years in retirement. With an annuity, you also have the choice to take your 25% tax-free, cash lump sum and then use the rest of your pension to pay for your annuity. There are different types of annuities to suit lots of different personal circumstances, but a lifetime annuity is often the most sought-after option.
What is a lifetime annuity?
A lifetime annuity is the most popular form of retirement income choice as you will receive an agreed income for the entire duration of your life (until you die). It is also the lowest risk option because your monthly amount is set and therefore, you know exactly how much you’ll receive and how long you will receive it for.
The amount you receive each month is decided at the outset and is based on the amount you have in your pension fund and more personal circumstances such as your age and medical history. This is because those who are seen to have a shorter lifespan due to illness or poor lifestyle can qualify for an enhanced annuity, and those who are older tend to receive a higher income because theoretically, they don’t have as long to live.
Things to consider if you take out a lifetime annuity
Although a lifetime annuity has little risk involved, there are a few things to consider when you invest in a lifetime annuity:
- Once your policy has been agreed, you cannot change any of the features of your annuity.
- Inflation will reduce the spending power of your income.
With a lifetime annuity, you can opt to have a guarantee period. This is where you nominate a beneficiary to receive your payments for a set number of years in case you die suddenly.
Joint and single annuity
When it comes to a lifetime annuity, you can decide whether you want a single or joint annuity.
With a single annuity, the payments you receive will stop when you die, which means a single annuity is most suitable for those who don’t have any dependents or if your partner has arranged their own pension income. However, if you have opted for a guarantee period, your income will continue to be paid to your chosen beneficiary, even after you die.
With a joint annuity, your income is received up until you die, but once you die, the provider transfers the annuity over to your chosen beneficiary and they then receive the payments until they die. A joint annuity is a good option if your marital partner cannot live solely on their pension or, perhaps they don’t have a pension at all. You will decide on the amount of income they receive after your death, but it’s worth noting that the more you agree to give your chosen beneficiary, the less you will receive yourself.
If you are suffering or have suffered from ill health, you could be eligible for an enhanced annuity. An enhanced annuity is where a provider will give you a higher monthly income during your retirement because theoretically, those who have health problems are likely to live for a shorter period of time. Enhanced annuities are also available to those who lead an unhealthy lifestyle, such as people who smoke or are overweight.
When it comes to annuities, being open and honest about your health and lifestyle state is really important, this is because you could be entitled to a higher monthly income if you opt for an enhanced annuity over a lifetime annuity, so it’s in your best interests to be completely transparent.
With an investment annuity, your income is based on an anticipated growth rate of the funds from the pension pot that you invested at the start of your annuity. The funds you put forward will then be invested in the stock market on your behalf, the rates will then be under constant surveillance and a bonus rate will be calculated. Your income will mimic the base rate, so if the base rate increases, your income will too and vice versa.
Although your annuity will be set to a minimum rate that it can decrease to, investment-linked annuities are a risk as you could be receiving a lot less if the investments don’t sway your way. With a lifetime annuity, you do not have the risk of a fluctuating income but you could be receiving a much higher income if you do take the risk with an invested annuity.
Why choose us?
When it comes to getting an annuity, it’s really important to shop around and research all the forms of annuity that are on offer to you, as a company that has access and connections in the UK annuity market, My Pension Expert is a great option if you want to shop around for the best deal possible and enjoy your retirement knowing you made the right decision.