Lifetime annuity

What is a lifetime annuity?

A lifetime annuity guarantees a secure, stable income for the rest of your life, regardless of how long you live. Your pension won’t run out, but you also can’t make changes to your level of income or frequency of payments.

The income you receive, either on an annual or monthly basis, is decided at the outset by your provider and is based on the size of your purchase fund and the annuity rate being offered at the time.

Things to consider

Although a lifetime annuity has little risk involved, there are a few things to consider before purchasing one:

  • Once your policy is agreed, you can’t make any changes.
  • If your circumstances change, you can’t come out of a lifetime annuity – you’re ‘locked in’.
  • Most annuity incomes remain the same throughout the duration of the plan; this is known as maintaining a level income. In these cases, inflation will reduce the real-term value of your payments over time due to increases in the cost of living. Your adviser will discuss this with you and may recommend an escalating annuity to counter this.
  • If you’re looking for flexibility or the opportunity to review your options periodically, then drawdown or a fixed-term annuity may be more suitable.

Fixed-term annuity

With a fixed-term annuity, you receive a secure income for a set period of time. At the end of the term, the unused portion of your fund (adjusted for growth and charges) will be returned to your pension plan, and you can re-evaluate what to do next.

What happens next?

When your plan comes to an end (or ‘matures’), your guaranteed maturity amount allows you to reconsider your options. At this point, you might decide to get another fixed-term annuity, or you could move into drawdown or opt for a lifetime annuity.

As your circumstances are likely to have changed throughout your fixed-term plan, it’s wise to seek up-to-date advice and get a new recommendation that’s tailored to you.

Things to consider

With a fixed-term annuity, there are a few things to consider:

  • Once your policy is agreed, you can’t make any changes – you’ll need to wait until the plan ends.
  • Like with lifetime annuities, your income tends to stay the same throughout the duration of the plan. Your adviser will discuss this with you and may recommend an escalating annuity if inflation and real-term value is a concern.
  • If you’re looking for more flexibility or the opportunity to review your options regularly, then drawdown may be more suitable.

How are annuity rates calculated?

Annuity providers determine how much income they’ll pay you by considering two factors: the size of your purchase fund and the annuity rate.

Annuity rates are closely linked to interest rates, so they tend to follow the Bank of England’s base interest rate. However, providers will also incorporate several other factors into the rate they offer to you.

This includes:

  • Your age
  • Your health and lifestyle
  • Where you live
  • Any added extras, such as taking out a joint-life policy or the inclusion of death benefits.

Health and lifestyle rate enhancements

Because your annuity rate is linked directly to your personal circumstances, your health and lifestyle can significantly impact the annuity rate offered to you by providers.

Throughout our lives, we see the negative impact that our health and lifestyle can have on financial products such as life insurance. But at retirement, it’s quite the opposite. If you smoke, drink, are overweight, or have medical conditions such as high blood pressure or diabetes, you could be eligible for an enhanced annuity rate.

That’s why it’s vital to share your medical history with our team when we ask for these details, as it allows us to find you the best-enhanced rates, giving you a higher potential income in retirement.

How do you compare annuity rates?

At My Pension Expert, we search the whole of the market to compare and secure the best possible annuity rates for our clients. You can find out your potential annuity income and compare other retirement options by speaking to one of our retirement specialists today.

Tailor your annuity

When taking out an annuity, there are a few additional options to consider. Just note that some features may affect the annuity rate available to you. Our retirement experts can help you understand what these options mean and whether or not they are right for you.

In addition to the options below, you may also wish to consider adding death benefits to your annuity.

Payment frequency

Although annuity providers offer quotes on an annual income basis, you can choose between the following payment frequencies:

  • Monthly
  • Quarterly
  • Half-Yearly
  • Annually

Regardless of your chosen payment frequency, you can also choose whether to receive those payments in arrears or in advance.

Escalating income

When comparing annuity quotes, you may come across the term ‘level income’. This means that the income you receive will stay the same throughout the duration of the plan.

However, you may wish to take your annuity on an ‘escalating income’ basis. Here, the income you receive increases annually either by a fixed chosen amount or by measures such as inflation or the retail price index. While you may start off with a lower level of income, having it increase over time can help you to future-proof your finances, making sure your payments maintain their real-term value.

Our team of independent financial advisers can explain all your options and provide a tailored recommendation to make sure your pension is in the best possible position to meet your needs and retirement goals. So, why not get in touch?