What is an Annuity?
With an annuity you can turn your pension pot savings into a guaranteed income for the rest of your life.
Access a larger retirement income if you are a smoker or up to 40% more income if you are in poor health.
You can opt to index-link your pension so it keeps pace with inflation or have a level pension, which stays fixed over time.
Speak to our expert advisers or get your instant online quote to compare the UK’s best annuity rates.
How Do Annuities Work?
- You choose to either use some or all of your pension savings to purchase an annuity.
- The provider will offer you an annuity rate based on a number of factors, such as your age, state of health, medical conditions and smoker status.
- To ensure the most competitive rate it is best to research the whole market as annuity rates can vary significantly particularly if you are in poor health.
- Once the rate is determined, the annuity provider agrees to pay you an income for the rest of your life (or for a set period, if you’ve opted for a short-term option).
Why Consider An Annuity?
You need a stable income for the rest of your life and aren’t looking to pass a pension pot down to loved ones
You don’t want to take any investment risk
You are a smoker, in ill-health or have a serious medical condition and could get an enhanced annuity rate.
You want to provide guarantees for your spouse and know they are looked after financially for the rest of their life should you die.
Your annuities rate will be based on such a variety of factors that it can be hard to know which provider will offer you the best terms.
You should always shop around to seek out the best rate, especially if you’re unwell as there may be a far more favourable annuity rate available on the open market.
Very rarely is it that your incumbent pension provider will provide you with the most competitive annuity.
Get instant Annuity Rate Quotes using our calculator and you can compare all the leading annuity providers to ensure you get the most competitive deal.
Expert Annuity Advice
When it comes to buying an annuity, it makes sense to get advice and do an annuity rates comparison from across the entire UK market.
It’s especially important to get annuities advice if you’re looking to purchase a product such as an investment-linked annuity or a fixed-term annuity. This is because there’s some element of investment risk with these products that is absent from a regular annuities.
Drewberry is well-placed to offer you pensions advice in a range of areas, not just annuities. It may be that another retirement product is more suitable for you, particularly if you’re looking for more flexibility in retirement. If that’s the case, could pension drawdown be a better option for you?
How Do Annuities Work?
A retirement annuity is a policy where you pay a lump sum upfront in return for a regular income for the rest of your life. Once you receive an annuity you’re known as an annuitant.
Annuities are essentially a life insurance product that works in reverse. Rather than paying regular premiums and getting a lump sum on your death, with annuities you pay one lump sum upfront and get regular payments until your death.
When you buy a retirement annuity, you’ll have to disclose a variety of factors to determine the rate you’ll receive on your pension income.
- Your age – the older you are when you purchase an annuity the more you’ll receive each year, as you’ll likely be receiving income for less time
- Your life expectancy – tied with your age, the lower your life expectancy when you buy annuities the more you’ll receive each year
- Your health/medical history – if you’re in poor health you’ll receive a higher income with an enhanced/impaired life annuity, as again you’re likely to be receiving income for less time
- Your smoker status – smokers get better annuity rates than non-smokers because of the higher risk of death among smokers
- Your postcode – your location has an impact on annuity rates because there are considerable differences in life expectancy across the country
Types of Annuity
- Level annuity – the simplest type of annuity, these will pay out a regular income of the same amount until you pass away. The amount will never increase over time to keep pace with inflation, so your pension could be reduced in real (inflation-adjusted) terms over time.
- Escalating/index-linked annuity – your annuity rate will rise each year, either by a set amount, e.g. 3%, or automatically increase by the retail prices index (RPI). You’ll get a lower initial rate but your pension won’t be outpaced by inflation over time.
- Single vs joint annuities – a single annuity rate is based on the life of one person and pays out until their death. Joint annuity rates are based on the life of two people, typically a pensioner and their spouse, and continues paying a widow’s pension after the initial pensioner’s death. This is usually a set proportion of the annuitant’s original income.
- Annuity with guarantee period – if you die between the start of the annuity payment and the end of your guarantee period (which you can choose, say ten years), the annuity will continue to pay out to your beneficiaries for the remainder of the guarantee period.
- Fixed-term/temporary annuities – rather than lasting for your whole life, these annuities pay out for a set period, e.g. five years, or until death, whichever is sooner.
- Enhanced annuity – designed specifically for people with a lower life expectancy, perhaps because they’re ill or they smoke, these annuities pay out a higher rate to compensate the annuitant for the fact they’ll likely be receiving their annuity for less time.
Many people don’t consider an enhanced annuity (despite the extra income it could afford them) because they don’t think they’re sufficiently ill to warrant taking one out. However, common conditions such as high blood pressure and diabetes can both be factors in enhancing your annuity rate, as can smoking, so it’s always worth considering this as an option if you’re unwell in any way.
Pensions & Investments Expert at Drewberry
Rauri was easy to talk to. Explained everything really well. Took prompt action when requested and was in touch when he said he would be without being pushy.
What is a Good Annuity Rate?
Tax treatment varies according to individual circumstances and is subject to change.
It’s hard to know what’s a good annuity rate for you without knowing your individual circumstances. That’s because your retirement annuity formula used to calculate your rate depends on so much, including your state of health, your age and your smoker status among other factors.
What is true is that often the best annuity rates aren’t found by sticking with your pension provider – just like any financial product, it pays to shop around to find the most appropriate deal for your circumstances.
After all, if you do opt for an annuity you have to live on that income for the rest of your life, so you need to maximise your pension pot and make it work as hard as possible.
Pensions & Investments Expert at Drewberry
Your annuity formula may be termed in percentages – e.g. if you get a £5,000 income from a £100,000 pension pot your annuity factor will be 5%.
Alternatively, you may see your annuity rate displayed in terms of the amount you’ll get per £10,000 invested, so a rate of 5% means you’ll get £500 per year for every £10,000 you invest.
Retirement Annuities Rates Table: Find Your Annuity Rate 2018
It’s important to realise that the below annuity factor table makes a number of assumptions, which we’ve had to do to in order to calculate rates. You can see the assumptions we’ve made below the table.
Total Annuity Purchase Price
55 Years Old
65 Years Old
75 Years Old
For instance, these annuities are level, so they won’t increase over time. We’ve also assumed that the individual has taken their full 25% tax-free allowance from their pension pot (so for a £1 million pot they’d have used £750,000 to buy an annuity).
Other assumptions we’ve made include:
- They’ve bought a single annuity
- They’re in good health
- They’ve got no pre-existing conditions
- They don’t smoke
- They don’t want a guarantee period so payments will continue after their death
- They live in East Sussex, in the same postcode as our Brighton-based financial advisers.
Calculate the Best Pension Annuity Quotes
The above retirement quotes have all been pulled from the Drewberry UK Annuity Calculator, which compares providers from across the UK annuity market. It’s possible to go to the various pension providers and get annuity quotes from all of them individually, but why bother when there’s a calculator to do it for you?
Drewberry will check annuity prices offered by the UK’s leading providers on your behalf to find you the best annuity deal on the market. Whether or not this will be most appropriate for you will depend on your circumstances and needs, but that’s where the importance of advice comes in.
Where to Buy Retirement Annuities: Leading UK Annuity Providers
Formerly Norwich Union, Aviva is one of the UK’s best-known financial services brands and the country’s largest insurer. Aviva’s annuities offering is part of its life and protection division.
Canada Life is a Canadian-headquartered insurance company with a major UK presence – its UK operations were founded in 1903. Canada Life annuities include both lifetime and fixed-term options. In August 2017, Canada Life agreed to buy another major UK provider, Retirement Advantage.
Hodge Lifetime was founded in 1965 and is a retirement income and lending specialist. As well as annuities, Hodge Lifetime is also active in the Equity Release market. In 2016, the company won the ‘Most Competitive Annuity Provider’ award at the Moneyfacts Investment Life & Pension Awards for the second consecutive year.
Following a merger with Partnership Assurance, Just Retirement became Just Group (or JUST) in 2017. JUST Annuities were previously sold under the Just Retirement and Partnership brands.
Legal & General
Founded in 1836, Legal & General is one of the UK’s best-known financial services brands. L&G is one of the top UK lifetime annuity providers.
Founded in 1843, LV is one of the UK’s largest general insurers. A friendly society with more than five million customers, Liverpool Victoria is also a sizeable annuities and pensions provider.
Part of Lloyds Banking Group – which has been trading since 1765 – Scottish Widows is an Edinburgh-based provider of life protection, investments and pensions, including annuities.
Providing insurance in the UK since 1815, Scottish Widows itself is an old, well-established brand.
The above table contains a selection of the major UK annuity providers. Others may be available to suit your needs and circumstances.
Should I Buy An Annuity?
Whether or not annuities are good value depends on a number of personal factors, so it’s hard to say if you should buy an annuity without speaking to you first and doing an analysis of these personal circumstances.
It’s true that annuity rates have fallen considerably in recent years and have seen little recovery since the financial crisis slashed annuity returns on investment. However, they provide a guaranteed, secure income free of investment risk and typically provide a spouse’s pension after the annuitant passes away. You must weigh up pros and cons of an annuity for your individual needs and circumstances.
An annuity is just one of your retirement income options, although it’s the one that offers the most in the way of security, guaranteeing your income for life. However, the inflexibility of this option and current low rates have made other options – such as pension drawdown – more popular as alternatives.
Financial Adviser at Drewberry
Why Buy a Retirement Annuity?
- You want a secure, inflation-proofed income for the rest of your life (and potentially for the rest of your spouse’s life, if you choose that option)
- You’re not comfortable with taking on your own investment decisions/risk
- Your pension pot is small and wouldn’t last long in pension drawdown
- You’re ill – you may get an enhanced annuity with a higher income
- You’re planning for care home fees – an immediate needs annuity can be paid straight to your care provider to cover care home costs tax-free
- You have a guaranteed annuity rate (GAR) from an old defined contribution pension, which may mean you get a far better rate than you’d be able to buy on the open market
- You have a spouse or partner who doesn’t have much in the way of pension provisions of their own and you want to leave them a guaranteed income.
Should I consider Pension Drawdown?
The value of pensions and investments and the income they produce can fall as well as rise. You may get back less than you invested.
Pension drawdown is an alternative to buying annuity, drawdown leaves your money invested in your pension with you able to draw funds as needed. Unlike an annuity where you guarantee yourself an income with drawdown you need to manage your fund sensibly to ensure it doesn’t run out. Opting to drawdown your pension rather than buy an annuity has a number of advantages:
- You want enhanced flexibility with your pension savings
- You want to take advantage of favourable inheritance tax rules when leaving drawdown lump sums on your death
- Buying a lifetime annuity is an immediate benefit crystallisation event, which may trigger the lifetime pension allowance – pension drawdown can be used to defer this until you’re 75
- You’re comfortable with and can afford to take investment risk
- You’re put off by the current record low interest rates.
Lifetime Annuity vs Pension Drawdown
Ultimately, it’s impossible to say whether you should opt for income drawdown or an annuity without knowing your exact circumstances. We always suggest you get tailored pension advice before making any decision about your retirement income.
You’ll have to weigh up the advantages and disadvantages of income drawdown with the pros and cons of a retirement annuity to decide which will provide the best pension for you.
Why not use our Pension Drawdown Calculator to see how much income you could expect to receive from your pension pot and compare it with our Annuity Calculator? That way, you’ll have a rough idea of which one could give you a better pension.
Pensions & Wealth Administrator at Drewberry
Get Advice on Your Annuity Options
Remember, if you do decide to buy an annuity you can’t go back and change your mind later. Most annuities are permanent investment products and you can’t pull out once you’ve invested. Pension drawdown, on the other hand, leaves you much more in the driving seat with the opportunity to purchase an annuity later if you wish.
Of course, which is the best pension option for you will depend entirely on your circumstances, which is why our pension experts are here to help. Just pop them a call on 02084327333 to get started on planning your retirement today.
Director at Drewberry