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Annuity FAQs

Reaching a decision on your retirement fund is important and it's only right that you will have a few questions before settling on one option. Here are a few of our most frequently asked questions.

The annuity rate will be altered by the return that insurance companies can obtain from relatively low risk investments. Typically these are Gilts (or loans to the government) and Corporate Bonds (loans to companies). This is driven by the markets.

Because the income must be paid for the rest of your life, the amounts paid will depend on mortality rates (how long we live). Because of developments in medical science and other factors, we are all living longer. This will push annuity rates down in the future (or at least until the overweight computer games generation of kids reach retirement?).

There are also items of legislation that will be introduced that are extremely likely to push annuity rates down. These are E.U. driven directives that will not allow sex discrimination in annuity rates (even though it is a fact that women generally live longer than men) and ‘Solvency 2’ will focus on the ‘capital adequacy’ a company must retain to guarantee your income. This will make it less profitable for the insurance companies.

All U.K. annuity providers are regulated by the Financial Conduct Authority. This means that your annuity is covered by the Financial Services Compensation Scheme (FSCS). If something happened to your annuity provider 90% of your payments would be guaranteed by the FSCS.

In addition, companies will have a Financial Strength rating from an Independent Ratings agency such as Standard and Poor’s or AKG.

The Prudential Regulation Authority will ensure that if the company are to offer a ‘guaranteed’ product, such as an annuity, that the provider has sufficient assets (money and investments) to meet its liabilities (pay your income).

An annuity is a retirement income plan, which is designed to provide an income for the rest of your life, no matter how long you live. Click here to read about annuities in more detail.

You normally use your pension fund to buy an annuity when you retire, to replace the income you received when you worked. However annuities are available from the age of 55.

No. You can choose who you buy your annuity from – it doesn’t have to be with the insurance company that you used to build up your pension fund. (This is known as the “open market option”). The amount of income you could receive from your annuity will vary between different insurance companies, so it’s a good idea to do some comparisons before making your decision.

The minimum amount you’ll need to purchase an annuity on the open market is £5000.00.

  1.   Your age
  2.   Your gender
  3.   Your postcode*
  4.   Interest rates at the time you buy your annuity**
  5.   The adviser you choose
  6.   The options you choose to add to your annuity
  7.   The Anticipated Bonus Rate you choose (for the With Profits Pension Annuity only).
  8.  Your health. Having poorer health may get you a higher income as you will be expected to have a shorter life expectancy.

You can normally choose to take up to 25% of your pension fund as a tax-free cash lump sum. This may be paid either by your pension provider or your annuity provider, depending on how you buy your annuity.

Watch the video answer to this question.

Please note this information is only a general tax summary and individual circumstances may differ. Tax rules may change in the future.

Your annuity income will be treated as earned income and taxed according to your personal circumstances. Your annuity income payments will normally be made after the tax payable has been deducted. Any payments made to you or your dependant’s estate may be subject to inheritance tax following death.

Your income will be paid directly into your UK bank or building society account and it may be possible to arrange for payments to be made directly into your bank account abroad.

Your income can typically be paid monthly, quarterly, half-yearly or yearly, depending on which annuity you choose. Income can also be paid either:

  •  ‘in advance’ (this means that income will be from the start date), or
  •  ‘in arrears’ (this means that income will be paid a month, quarter, half-year or year after the start date)
  •  ‘chosen start date’ (this means you can choose to have your income paid on a certain date each month. The first payment must be paid within one month of the start date of the plan and is only available where income is paid monthly).

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Your annuity plan will end when you die unless:

  • You have chosen a guaranteed period option. If you die within that time, your estate will be paid the remaining payments.
  • An annuity is to be paid to a dependant.

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It’s important to choose an annuity that is right for you. The options you choose at the outset can’t be changed once you’ve bought your annuity and it has no cash-in value at any time.

You can change your mind within 30 days from the date you sign the application form. If you cancel during the 30-day period, the funds will be returned to your original pension provider, however they are under no obligation to accept the funds. The refunded payments may be less than the amount paid to buy your retirement benefits if our annuity rates have changed.

If you exercise your right to cancel, the annuity provider will refund any payments to your previous provider or pension scheme only when any annuity payments already made and any tax-free cash lump sum you have taken have been returned.

You must also gain agreement from the transferring pension scheme that they are willing to accept the pension funds back. If the pension scheme will not accept this, we will then need to gain agreement from another insurance company to receive the funds.

Inflation is the rate of increase in the level of prices for goods and services, which affects the purchasing value of money. The rate of inflation is expressed as a percentage and in the UK the most detailed measure of inflation is the Retail Prices Index. Inflation has the power to erode the value of an investment, so any money you invest has to grow by at least the rate of inflation just to stop its purchasing power from falling.

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The Retail Prices Index (RPI) is a measure of inflation often described in terms of a shopping basket containing some 650 goods and services, chosen as indicators of price movements for a range of similar items.

Historically, If you were employed you could contract out of the State Second Pension. One option is to contract out using a personal pension or stakeholder pension. This means that you give up your right to benefit from State Second Pension for the period you are contracted out. As a result, your State Second Pension benefit will be reduced. In return, HM Revenue & Customs sends your selected pension provider a rebate of part of your own and your employer’s National Insurance contributions.
These were invested in your plan and the fund was called ‘Protected Rights’. Please note that SEPRS and Contracting Out no longer exists and the old term ‘Protected Rights’ no longer exists. These funds are treated in the same way as any other pension fund.

You may be able to combine your different pensions into one overall fund to maximise the type of annuity you can buy. This will depend on the pension scheme you have, so when getting annuity quotations, ask if you’re able to combine your various funds.

Although most people decide to take a tax-free cash sum from their pension fund up front, you don’t have to. You could keep it invested and use it to buy a larger retirement income. However this may not be the most tax-efficient way to provide any extra cash flow you need, as the income payable through a personal pension or annuity is taxed.

The Open Market Option means you are free to shop around and choose who you purchase your annuity from. Annuity rates can vary considerably between providers and, even with one provider, the rates can differ according to the annuity options you choose. The top provider for one set of options may not come out on top for another set.

If you have a medical or lifestyle condition you may qualify for an increased income through enhanced terms. This normally pays a higher income.

This is a price index that specifically accounts for the products and services that someone over 55 would buy.

This price index is a measure of price increases of a basket of goods and services that excludes mortgage payments.  It is being introduced so that more suitable comparisons can be observed against EU states.

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