Guide

ThinkIFA guide to the ‘Pension Annuity’

What is a pension annuity?

OK, so you’ve spent some or most of your working life paying into your pension plan and now that you are coming up to retirement it is time to withdraw your money right?

Well it’s not quite as simple as that. When it comes to cashing in your pension scheme, you have the option to use the lump sum to purchase an income (which is know as an annuity). This income must last for the rest of your life and how much retirement income you can achieve will be dependent upon several different factors such as:

Couple comparing annuities

The size of your pension pot

How much you have managed to save into your pension scheme will affect the level of income you can achieve. Obviously, the larger your pension pot the larger the income you can purchase.

Your health

If you are in poor health or have been diagnosed with a medical condition then you may be able to achieve a higher annuity rate.

This is because pension annuity providers will calculate that you have a lower life expectancy due to your health and would potentially pay your income for a shorter period of time as you would be expected to die sooner. This is known as an enhanced annuity.

“Choosing the right annuity at the start is very important as once you have bought your annuity you cannot change your decision.”

How much you withdraw as a tax free lump sum

When you come to retire, you are allowed to withdraw up to 25% of your pension pot as a tax free lump sum.

If you do decide to withdraw a lump sum then this will obviously reduce the amount you have left to purchase your annuity with which will result in a smaller level of retirement income when compared with using the whole of your pension pot to purchase your annuity.

Which annuity provider you choose

There are a lot of providers here in the UK and how much income (annuity rate) they offer will vary between each different provider.

When you are looking to buy an annuity it is essential that you shop around and compare annuities using the ‘Open market option‘.

Your postcode

Believe it or not, many pension annuity providers take your address into consideration when calculating their annuity rates.

This is because mortality rates (life expectancy) differ in different areas of the UK. If you live in an area with a lower life expectancy then you may potentially be offered a better rate for your annuity as the provider will calculate that you are more likely to die sooner and would therefore pay your income for a shorter period of time.

Compare before you buy!

The FCA (financial conduct authority – previously known as the FSA – Financial services authority) have now made it compulsary for all annuity providers to include in their pension statement (also know as a ‘wake up letter’) that you have the option of using the ‘Open Market Option’ when purchasing your annuity rather than just going with your default provider.

Annuity comparison

By exercising the open market option you can compare annuities from every single UK provider to help ensure you receive the best possible retirement income.

There is a very good reason why the regulators made it compulsory for all UK pension providers to inform their clients of the open market option which is if you shop around and compare annuity rates from all of the UK’s different providers, it is very likely that you will be able to achieve a higher income when compared with the default offer from your current pension scheme provider.

By speaking with an independent pension adviser, they can offer fully independent financial advice and can use the open market option to compare all the very best annuity rates and advise on which ones are most suitable for your specific requirements.

Once you have purchased your annuity, there is no going back so by comparing your options carefully and working with a financial advisor, you can be sure you will be making a well informed decision.

Are there different types of pension annuities?

Yes there are several types of annuities and when it comes to purchasing yours, you should always ask about an ‘enhanced annuity’ or ‘impaired life annuity’ to see if you are eligible.

These will pay a higher income than regular ones and are designed specifically for people who are more likely to have a lower life expectancy due to a medical condition, lifestyle, smoker etc.

Speak to an independent financial adviser today to find out if you could qualify for an enhanced annuity as this could make quite a significant improvement to your income throughout the term of your retirement.

There are also ‘flexible’ and ‘fixed term’ annuities available

For a comprehensive report on the different types of pension annuities available please see our extended report on pension annuities.

Purchasing your annuity through an independent financial adviser?

Here are the main benefits of comparing and purchasing your pension annuity via an ‘independent’ financial advisor (not restricted):

  • Access to every single annuity available in the UK!
  • Many advisers use state of the art annuity comparison software which means they may be able to find you a better deal than you applying direct.
  • An IFA can help you and answer any questions you may have.
  • A financial adviser can also help with your application process.
  • Should you have a complaint, an independent financial adviser should be regulated by the FCA – financial conduct authority, who are the UKs financial regulator. If you go direct then you may not be eligible for compensation should your annuity not be the most suitable.


What should I do now?

If you would like to speak with an independent pension adviser then please complete our annuity enquiry form below.

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