An annuity provides a guaranteed income for life, so it's a low-risk way of providing for your retirement.
Like most things in life, it pays to shop around – in fact with annuities you have a legal right to do so. Shopping around is called using the ‘Open Market Option’.
Whilst there are alternatives, here are some of the more common reasons people choose to purchase a lifetime annuity.
Ideal if you don't like the idea of taking risks, or worrying about how investments are performing.
You can choose an annuity that increases by a fixed percentage each year, to help protect against the effect of inflation. Your income will be lower to start off with, but will increase over time to help keep pace with inflation.
With annuities, you can arrange for your payments to go to your partner after you die - for the rest of their life. Other options allow you to leave an income for a fixed length of time, commonly 5 or 10 years, or even a lump sum of any remaining pension pot to a person of your choice. These are called 'joint life', 'guaranteed periods' and 'value protection'.
People with a health risk or condition can get what's called an 'enhanced annuity' - some of our panel of providers may offer to pay up to 40% more than a regular annuity. This is because you are likely to have a shorter life expectancy.
Never just accept your pension provider's offer. There could be significant differences between the best and the worst annuities - sometimes by as much as hundreds of pounds a year.
In fact, it's not uncommon for some providers to pay up to 20% more income per month, and for those people with a health risk or condition, it can increase by up to 40% through an enhanced annuity. And don't forget, that extra income could be guaranteed for the rest of your life.
Usually, if you're a smoker, suffer from diabetes, high blood pressure or another relatively minor medical condition you get penalised (for example, the cost of life cover is generally higher or not available at all). But with an annuity, it's the opposite - in fact, you could get an enhanced annuity which pays you more. It's because people that smoke or have health complaints often have a lower life expectancy - so their annuity ‘pot' is spread over fewer years. But even if you're still going strong at 100, your annuity keeps paying. It is guaranteed for your whole life irrelevant of any changes to your health after you take it out.
At Nationwide we ask all our annuity customers a few simple questions to see if they could qualify for enhanced rates, and many lifestyle and medical factors can normally be assessed without a requirement for a full medical examination.
Did you know
You don't need to be suffering from a serious health complaint to qualify for an enhanced annuity. At Nationwide we ask all our annuity customers a few simple questions to see if they qualify for enhanced rates. We've also made sure that the process of gathering medical information as easy for you as possible, and it may be as simple as a phone conversation.
Research shows that the majority of retirees could qualify for an enhanced annuity. Ensure you disclose any conditions or illnesses you may have been diagnosed with - from high cholesterol or blood pressure, through to more serious conditions such as heart conditions or cancer - as the annuity market takes into account over 1,500 conditions and lifestyle factors. So checking to see if you're eligible should be one of the first considerations of your retirement income plans.
It's important that you provide full details of any medical conditions you have suffered from and any ongoing symptoms or treatments that you are receiving. Remember to disclose as much information about your health as possible, as this may give you a higher level of enhancement. Annuity rates are based on you answering all questions accurately and honestly. Evidence may be required and its worth noting that if the condition cannot be verified (for example by your GP) the annuity provider has the right within six months to reduce your annuity.
The Nationwide Annuity Service will make the process of gathering any medical information we need to confirm your medical condition as easy as possible.
Please note that in relation to an enhanced annuity, you may sometimes hear the term ‘impaired' annuity (where someone has a life threatening health condition). We will always call this an enhanced annuity.
Philip is 65 years old with a £50,000 pension pot. His current pension provider offers an annuity worth £1,628 a year. Through the Nationwide panel of annuity providers, he was able to secure an offer of £2,140 a year for the rest of his life.
Assuming that Philip lives until he is 80 this could amount to an extra income of £7,680 after 15 years.
The example shown is based on a real life case, and is based on an escalation level of 3% per annum, with a guarantee period of 10 years, with a purchase price of £50,000. All information is correct as at 8 August 2012. Actual annuity amounts payable will depend on individual circumstances and annuity rates at that time.
Susan is married with two grown-up children. She's 65 and has just received a letter from her pension provider saying she has a fund of £50,000, and can access it in six months time. They're offering her a pension annuity of £1,433 a year.
Susan would be able to secure an annuity of £2,416 a year for the same £50,000 fund by utilising the Open Market Option. She has diabetes, so that helps her get an enhanced annuity.
Assuming that Susan lives until she is 80 this could amount to an extra income of £14,745 after 15 years.
This example shown is based on a real life case, and is based on an escalation level of 3% per annum, with a guarantee period of 10 years, with a purchase price of £50,000. All information is correct as at 8 August 2012. Actual annuity amounts payable will depend on individual circumstances and annuity rates at that time.
Nationwide's service provides the kind of annuities normally chosen by most people - but there are alternatives. For instance you may want to defer buying an annuity and to remain invested because you anticipate annuity rates to rise in the future, or because you do not need the full annuity income that would be available.
The alternatives to lifetime annuities are more complex and carry more risk than conventional and enhanced. They usually incur higher charges which, when taken from your total pension fund, may reduce your future income.
Some alternatives, such as pension drawdown and phased retirement may only be suitable if you have a large pension fund or other substantial assets and are prepared to take some risks with your pension fund to get greater flexibility and the potential for higher return. They also require thoughtful planning and ongoing management.
So what are the alternatives?
Below is a list of the main types of alternatives to conventional and enhanced lifetime annuities, with a brief description of the key risks and benefits.
Nationwide cannot provide you with advice on alternative products to conventional and enhanced lifetime annuities, but should you wish to explore any of the alternatives you can get in touch with an independent financial adviser (IFA) by visiting www.unbiased.co.uk
The numbers of people deferring their full retirement and working beyond 65 has soared in recent years.
At the end of 2010 more than 800,000* were continuing to work in an effort to supplement their retirement income, boost their savings or because they wish to carry on working.
So instead of converting the whole of your pension fund into a single annuity you may decide to phase your retirement.
You can withdraw a series of tax-free lump sums and set aside partial payments to provide income through an annuity or by using pension drawdown. This approach allows you to take advantage of changes in annuity rates and preserve funds in your pre-retirement environment.
However, there are risks in that annuity rates may be lower in the future – which could mean a lower income for life, or that the value of your pension fund may decline.
You must also consider whether the potential of a greater future income is worth missing out on income now. For example if you could get an income of £1,000 a year now, but waited a year and got £1,100, it could take 10 years to make up for the income lost by delaying.
The Nationwide Annuity Service can help you in taking your benefits in stages using lifetime annuities. However, if you want to consider ‘phased’ pension drawdown, you will need to get in touch with an independent financial adviser.
* Office for National Statistics, 2011.
There are a few different kinds, but they all work in much the same way. Here your pension pot is put into an investment fund, which is tied to the stock market. So if the market goes up, so does your income. But if the market goes down, your income could drop too. Naturally, there’s an element of risk which you need to decide if you’re comfortable with.
Unlike conventional lifetime annuities where you secure an income for life, a fixed term annuity buys you a guaranteed income for a set period only (usually five years). After that period, a guaranteed maturity fund becomes available for you to purchase either another fixed term annuity or a conventional lifetime or enhanced annuity. This generally results in a lower starting income than a conventional annuity, but allows you to keep your options open. By delaying the decision to buy a lifetime annuity, you’re accepting the risk that annuity rates may be lower in the future – which could mean a lower income for life.
Here you can withdraw a taxable annual income from your pension fund, leaving the remainder invested. Among its advantages are the ability to control your ongoing investment; when you buy your annuity; income flexibility and improved death benefits. It’s generally only suitable for people that may still be working or looking to reduce their working hours gradually, or may have income from other sources, or who accept that there is an element of investment risk. So if the market goes up, so does your income. But if the market goes down, the value of your fund and your future income could drop too.