Updated: June 24, 2019

Annuity Payments

To answer all of these questions, and define how an annuity payment is formulated, we’ve put together this guide which covers:

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Tony Stevens

Author: Tony Stevens - Finance Expert

Updated: June 24, 2019

We get lots of enquiries from people reaching their retirement age who would like to understand how annuity payments are calculated, when they can be paid and what happens if you die with any remaining funds.

Understanding how annuities payments work is an important part of your retirement planning. Once you’ve read through the details below make an enquiry and we can arrange for a pensions advisor we work with to contact you directly.

What is an annuity payment?

Purchasing an annuity is one option available to anyone who has contributed to a defined contribution (DC) scheme once they have reached retirement age (from age 55 onwards for DC schemes).

The savings from your pension fund are used to buy an annuity and in return you receive a guaranteed income either for the rest of your life or for a fixed time period.

The definition of an annuity payment is fairly straightforward. It is one portion of your annuity retirement income, typically received on a frequency of your choosing. Details of how the periodic payment of an annuity works are outlined below.

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How to calculate an annuity payment

Annuities can be purchased from many different UK insurers. Each provider will have their own internal guidelines, supervised by qualified actuaries, for calculating an annuity rate which will then be used to work out how much the payments will be.

An insurer does this by reviewing the following information:

  • Your age at the point where you apply for an annuity
  • The size of your pension fund
  • Health and lifestyle (smoker / non-smoker etc)
  • The type of annuity you want (lifetime or fixed-term)
  • Where you live

Once all of these factors have been taken into account the insurer can calculate your payments using the annuity rate.

For example, if you have a pension fund of £250,000 and an insurer offers you an annuity rate of 5% your annual annuity payments will be £12,500 either for the rest of your life or for a set term, depending on what type you have selected.

You can either use 100% of your pension pot or take 25% as a tax-free cash sum at the outset and use the remaining 75% for an annuity to provide regular income payments during retirement.

Annuity rates can vary depending on the provider, therefore, if you’d like assistance to find the best rates available make an enquiry and we can arrange for a specialist to get in touch.

Will I receive monthly annuity payments or can I choose a different frequency?

Essentially, an annuity is a stream of guaranteed cash flow payments made during regular periods over a pre-agreed timescale (your lifetime or a set term).

Typically an annuity is received as a monthly payment, however, most annuity providers offer a variety of regular payment schedules. In addition to monthly, the payment of your annuity income can usually be received quarterly, half-yearly or yearly.

All payments from annuities are subject to UK income tax and will be added to all other sources of income during a tax year.

Annuity payments can differ depending on the product you select. If you’d like to know more about the different types of annuities available get in touch and we can arrange for an annuity expert to speak with you.

What happens to my annuity payments after my death?

In the event of your death your annuity payments will either cease or be passed on to your spouse or another nominated beneficiary, depending on the type of product you have purchased with your pension fund.

A lifetime annuity means exactly that, therefore, all income payments will cease upon your death and any remaining funds will remain with your provider.

However, for a joint-life annuity, payments will continue until the last survivor’s death. So, for example, if you die before your spouse the annuity payments will continue whilst your partner is still alive.

Guaranteed fixed-term annuities (usually for 5 or 10 years) will also repay any remaining funds to a nominated beneficiary in the event of your death during the fixed period.

Do I have to buy an annuity with my pension fund?

No, not at all. Purchasing an annuity is just one of the choices available to you when you reach retirement. A change in pension rules introduced in 2015 offered a range of different options for how you use your pension pot.

If you’d like to know more about the other options available to you take a look at our article here. Alternatively get in touch and we can arrange for an expert to speak to you directly.

Speak to an annuity payments expert

The guaranteed income provided by regular annuity payments make them a very attractive option for your retirement fund. However, once you buy an annuity you cannot change your mind, therefore it’s important you make the right choice.

Finding the insurer who can provide the best annuity rates and highest payments can be a tricky task on your own. Many people in your position seek professional advice in order to help them make a final decision.

If you have questions and want to speak to an expert for the right advice, call Online Money Advisor today on 0808 189 0463 or make an enquiry here.

The advisors we work with have a wealth of experience in areas such as this and deal with customers in your situation all the time.

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We can help! We know everyone's circumstances are different, that's why we work with brokers who are experts in pensions Ask us a question and we'll get the best expert to help.

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Tony Stevens

Tony Stevens

Finance Expert

About the author

Tony has worked in a vastly diverse array of areas in the pensions industry for over 20 years. Tony regularly writes for trade press, usually on topical and pensions pieces as well as acting as a judge at prestigious national events.

Tony is also a highly qualified Independent Financial Adviser in his own right. His mantra has always been “Hope for the best, but plan for the worst”, and believes that the biggest impact that an adviser can have on a client’s life journey is to take them on a journey from generally having little or no real idea of what their retirement will look like, to giving them the understanding of what their retirement looks like now, then helping them navigate a path to what they want their retirement to be.

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