Buying Pension Annuity - What You Need To Consider

A pension annuity is the retiremment income that you get for the rest of your life from the pension fund that you have built during your working life.

You have worked hard during your entire working life and have been prudent to save for your retirement.

When you are approaching your retirement age, your pension provider will write to you to advise you of the value of your pension pot. You don't have to buy your pension annuity that your pension provider offers you. You need to shop around for the best deal on the open market.

You should speak to an independent financial advisor who will help you find the best deal available.

Here are the main points you need to consider when shopping around for the best pension annuity.

• Single life annuity pays you an income for the rest of your life. The level of income you get will be higher than that offered by a joint life annuity.

  However, there is no provision for your spouse/partner or financial dependant if they survive you.

• Joint life annuity pays you an income for the rest of your life. Upon death, your surviving spouse/partner or financial dependant will continue to receive an income at the agreed level at the commencement of the annuity.

  The income level you can leave after your death is normally 50%, 66% or 100% of your pension annuity and they will continue to receive the annuity for their lifetime.

  However, you will receive a lower level of annuity than a single life annuity and this will be reduced further if you decide to leave a higher percentage to your spouse/partner or financial independant after your death.

• Level income pays you a fixed income which is set when you buy your pension annuity.

  This option pays you a higher fixed income for the rest of your life than an escalating income option but does not increase annually to combat inflation.

• Escalating income pays you a retirement income that increases annually by a fixed percentage or varies in line with the Retail Price Index (RPI).

  However, you will start with a lower level annuity and this will increase annually. It can take several years before your annuity reaches the amount that is provided by the level annuity. If you decide to have your annuity level change with the RPI, it is possible that your income could reduce if the price of goods and services included in the index are lower that they were a year earlier.

• If you opt for a no guarantee period your retirement income will cease on death unless you have opted for a joint life annuity.

  Your pension annuity will be slightly higher than an annuity with a guarantee period.

• If you choose to have a Guarantee Period your income will continue to be paid to the beneficiary of your estate on your death if you die within the guarantee period (usually a 5 or 10 year period).

  However, your income will be slightly lower than if no guarantee period is taken.

• An annuity (value) protection protects your premium if you die before the age of 75. The maximum lump sum payable is the premium received less any income paid or payable under the guarantee period.

  Your annual income will be lower than if no annuity protection is selected and any lump sum payment will be taxed at 35%.

• If you choose your annuity payment in advance your payment is paid on the start date of your policy. Your income will be paid in advance to you according to the payment frequency (monthly, quarterly, half yearly or yearly).

However, your income will be less than the corresponding frequency paid in arrears.

• If you choose your annuity payment in arrears then your income will be paid a month after the start of your policy.

  Your income could be higher than the corresponding frequency (monthly, quarterly, half-yearly or yearly) paid in advance. A yearly payment is likely to pay the highest level of income in most cases.

Other factors that can affect the level of your pension annuity include:

• interest rates - the level of interest rate will affect the level of annuity you will receive.
• mortality - your life expectancy and the state of your health will affect the annuity rate. If you are a smoker you are likely to receive a higher annuity.
• gender - the starting annuity for a man is higher than for a woman beacuse, on average, women live longer than men.

If you are prepared to shop around you can buy the right pension annuity in the open market to boost your retirement income by up to 25%.

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