Annuities
An annuity is simply an income purchased with capital. The most common use for an annuity is in pensions, but not all annuities are pensions related.
In this context, where the pension is purchased by using the built up fund, the pension is an annuity.*
At its most basic, a pension annuity is simple – you hand over your fund, you get an income until you die.
In detail it is more complex: -
Open Market Option
As a pension fund holder you should be told that as well as buying an annuity from the company with whom you have saved your pension, you can take the fund to another company and buy it from them.
It may be in your interest to explore this option. It is highly likely that you will be able to get a much better pension by moving the fund.
(It is also worth noting that, to some extent, the annuity rate that a company can offer will depend upon many things outside of its control. Sometimes companies not normally noted for their annuity rates will offer good ones, sometimes those with good rates offer poor ones).
The rest of the options are largely driven by your personal circumstances, and possibly governed by scheme rules: -
-
Would you like your income to be fixed, or rise each year (by a fixed percentage, or inflation etc)?
- Are you in ill health?
To be blunt, do you suffer from a health or medical condition likely to kill you significantly before your time? If you are, then it may be possible to apply for an enhanced or impaired life annuity to reflect the fact that your early death is likely.
-
If you have a partner, do you want the pension to continue after your death, until theirs, and if so, do you want the level to be maintained, or reduce?
-
Are you concerned about a sudden early death (say next week) and that if this happened, your pension fund would be lost to your beneficiaries? If so, you can opt for a guarantee, or or an annuity protection lump sum death benefit, both of which are ways of ensuring that some/all of the used fund goes to your inheritors.
* Not all pensions are annuities. The main exceptions are Defined Benefit Schemes (which do not have to go the annuity route, though may choose to do so) and State Pensions (which are taxpayer funded on a year by year basis).
Last updated on April 11, 2008