Getting the best annuity rate requires researching the whole UK market. You’ll need to search the top annuity providers to get the right pension for your retirement as the income they provide can vary from one provider to the next.
Once you make the decision to buy an annuity you can’t change your mind, so you have to be sure you’re getting the best possible rate. If you’re opting for an annuity it’s important to do the necessary research to maximise your guaranteed income from your pension so you can enjoy the best retirement.
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Don’t just assume the offer from your pension provider will be the best annuity rate. It pays to compare annuities from the whole market to find the right pension for you.
An annuity is a regular income paid to you by a financial services company until you die. You buy this with all or part of your accumulated defined contribution pension fund and, in exchange, you receive a regular income for life.
Historically, pension rules required you to turn your pension fund into an annuity if your pension pot was below an arbitrary figure. Now, though, the 2015 pension freedoms mean that you can decide how and when you spend your pension money.
You could convert it all into an annuity. Or you could take part of your pension as an annuity and leave the remainder invested, taking income from it as you wish (known as pension drawdown).
The main advantage of an annuity is that your pension fund cannot run out. The annuity is guaranteed for the rest of your life and is 100% backed by the Financial Services Compensation Scheme.
Whether an annuity is best for your retirement depends entirely on your circumstances, but there are a number of benefits to having one. Firstly, the cash never runs out, so you won’t have to worry about exhausting your pension savings in your old age.
There’s also no investment risk – once you’ve handed over your pension pot your income is safe no matter how markets perform. What’s more, as people are living longer the chance for a lifelong income is looking more attractive.
No, it is not mandatory to buy an annuity when you reach retirement. As mentioned, the new pension freedoms mean that you are no longer required to buy an annuity. This used to be a requirement for those with smaller pension pots, and for everyone once they reached the age of 75.
One alternative option you have is drawing down your pension instead. Here you take all or some of your pension pot and invest it in a drawdown fund, withdrawing cash lump sums and / or income payments from it as you see fit.
The flexibility of this option is reflected in the name: flexi-access drawdown.
While an annuity pension prevents your income from running out, with pension drawdown there’s a chance it might. The value of your pension could fall as well as rise with drawdown, meaning you could get back less than you invested.
Your annuity rate — which determines how much annuity you can buy with your pension — will depend on a number of factors.
Calculating the cost of an annuity requires taking into account a number of factors, including:
Below is an annuity rates table indicating the annuity value an average, healthy male could expect to receive at age 60 and age 70 with three varying pension pots. However, it’s no substitute for getting your own annuity rate — for that use our annuity calculator.
Total Pension Pot
Assumptions we’ve made to calculate the rates in this annuity factor table include:
We’ve made a number of assumptions to calculate these annuity rates, which is why they can only be a rough approximation of how much annuity your pension will buy.
To get the best annuity rate, you need to research the entire market to look at what each provider will offer.
You can do this yourself, carting around your details to the various different annuity companies to see what they’ll offer you or you can use our Annuity Rates Calculator will do all of the legwork for you by comparing the leading providers.
The annuities with the highest interest rates tend to be for those who are ill and have a shortened life expectancy. Known as enhanced annuities, this assumes you’ll be drawing on your annuity income for less time and so pays a higher income. This could be because you have an illness or you’re a smoker.
Single annuities will pay a higher rate than a joint annuity. As joint annuities continue paying out to a partner after your death, the annuity company estimates that they’ll have to pay out for longer and so will likely offer a lower rate.
An alternate way to secure an annuity that will continue paying out after your death is to buy an annuity with a guarantee period.
This will continue to pay out for a set number of years after you pass away, providing you die between the start of the annuity payment and the end of your guarantee period. You choose the length of the guarantee period – the longer your guarantee period, the lower your annuity rate.
Escalating annuities rise each year in line with inflation. If you choose to index-link your annuity, you’ll likely receive a lower initial income in exchange for the fact that your pension income will rise each year.
However, index-linking an annuity is a powerful way to ensure that inflation doesn’t reduce the ‘real’ value of your pension over the long-term.
Short-term annuities last for a set period, say five or ten years, or until you die (whichever is first). This is compared to lifetime annuities, which last for the rest of your life. These tend to offer higher rates than lifetime annuities because they’re paid for less time, meaning you need to use less of your pension pot to buy one.
A capital protected annuity – also known as a value protected annuity – protects a set proportion of your initial investment. This is then returned to your family after your death if you die before receiving in annuity income the equivalent sum you paid the annuity company.
If you opt for a capital protected annuity, then your annuity rate will be lower. The larger the proportion of your initial annuity payment you’re looking to protect, the lower your annuity rate will be.
A deferred annuity is where you agree with your annuity company that you won’t begin receiving your annuity until a later date. This is opposed to straight away, as is typically the case with annuities. The longer your deferred period, the higher your annuity rate.
Formed from the merger of CGU PLC and Norwich Union in 2000, Aviva is today the largest insurer in the UK. As part of its financial services offering, Aviva annuities are sold through its life and protection division.
Canadian insurance company Canada Life has been operating in the UK since 1903 and, in August 2017, expanded further by purchasing another UK annuity provider, Retirement Advantage. Canada Life annuities include both fixed-term and lifetime options.
Founded in 1965, retirement income and lending specialist Hodge Lifetime offers a range of retirement solutions, including annuities and equity release. In 2016, Hodge Lifetime’s annuities saw the company win the ‘Most Competitive Annuity Provider’ award at the Moneyfacts Investment Life & Pension Awards for the second year in a row.
Rebranded as JUST in 2017 following a merger with Partnership Assurance, the company previously sold annuities under both the Just Retirement and Partnership brands.
Legal & General
Legal & General is one of the UK’s most-recognisable financial services brands and was founded in 1836. L&G’s annuities are therefore backed by one of the oldest providers in the country.
Founded in 1843, Liverpool Victoria is a friendly society and one of the UK’s largest insurers. As well as general insurance, LV is also one of the UK’s largest annuity providers.
Formed in 1815, Scottish Widows has been part of Lloyds Banking Group since 2009. The Edinburgh-headquartered financial services provider offers Life Insurance, investments and pensions, including annuities.
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Very helpful from start to finish. Talked through all the points and gave great advice.