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        Updated: April 16, 2024

        Types of Annuity

        Annuities come in various shapes and sizes. Find out what types are available and how to choose the right one for you in this guide

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        Once you reach retirement you have a decision to make regarding what to do with your pension fund. For anyone who has used a defined contribution scheme for their pension savings, one of the main options available is to purchase an annuity.

        If you choose this option you then have another decision to make – which one should I buy? This article takes a closer look at all the different types of retirement annuities available in the UK in order to help you make a more informed choice.

        Different types of annuities defined

        An annuity is an insurance product which can be bought using some or all of your pension fund to provide you with a guaranteed income for the rest of your life or, if you prefer, a fixed period of time.

        The amount of income you receive from an annuity will mainly be determined by the following factors:

        • Size of your pension fund
        • Your age when you buy the annuity
        • The provider’s annuity rate
        • Your current health and lifestyle
        • How you want the income to be paid
        • On a joint or single life basis

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        What are the most popular types of annuities?

        The two most common types of annuity used for the purpose of generating retirement income would be:

        Lifetime Annuity

        As the name suggests, a lifetime annuity will provide you with an income for the rest of your life. Typically, they can be available on either a single or joint-life basis. A joint-life annuity is usually purchased on a ‘last survivor’ basis, so the income will only cease once both parties named on the policy have died.

        For a standard lifetime annuity, in the event of your death, any remaining funds are retained by the insurance provider and cannot be paid out to beneficiaries.

        The key benefit of a lifetime annuity is that you have the comfort of knowing you will be guaranteed to receive a certain amount of income regardless of how long you live.

        Fixed-term Annuity

        A fixed-term annuity will provide you with an income for a set period of time (typically at least five or ten years). After this time has elapsed you will receive a lump sum payment – called a maturity value – back which can be used to purchase another annuity if you wish.

        The main benefit of a fixed-term annuity is that you do not have to be tied to one provider’s particular annuity rate for the rest of your life. Once the term has ended you are free to purchase another income product from a different insurer.

        For more information on either lifetime or fixed-term annuities, give us a call on 0808 189 0463 or get in touch and we will arrange for an expert to contact you directly to discuss further.

        What other types of retirement annuities are available?

        There are a whole host of other types of annuities available in the UK. These are all, largely, variations of either a lifetime or fixed-term annuity albeit with specific key features designed to assist with a particular need or requirement.

        Guaranteed Annuity

        This type of annuity will pay a guaranteed amount of income for a fixed number of years, regardless of whether the original policyholder dies during the term.

        So, for example, if you take out a 15-year guaranteed annuity and you die after five years, the annuity payments would continue to be paid to a nominated beneficiary for the remaining ten years of the term.

        A guaranteed annuity is particularly beneficial to anyone who would want a spouse or family member to benefit financially from their pension fund after they had passed away.

        Variable Annuity

        A form of lifetime annuity where the policyholder chooses at the outset a portion of the pension fund to provide a guaranteed income and the rest is linked to a range of different investments.

        There are usually two types of variable annuities, based on the underlying investment fund:

        If the investments perform well any growth can be taken as additional income. If they underperform then you will receive only the guaranteed income amount.

        Single life annuities

        Single life annuities are a form of lifetime annuity based solely on one life assured (typically the individual who also bought the annuity). If you buy a single life annuity you will receive a guaranteed income for the rest of your life.

        You can also use your pension fund to buy a single life annuity with a guaranteed term, which means the income will continue to be paid to a beneficiary if you were to die during this fixed period.

        Joint life annuities

        Joint life annuities are a form of lifetime annuity used most frequently by retired couples and will pay a guaranteed income whilst both you and your spouse remain alive. The annuity rate for joint life annuities are typically lower than for single life, based on the expectation that the policy will run for a longer time period.

        Level Annuity

        Level annuities pay the same amount of income for the lifetime of the policyholder. A level annuity will attract the best rate at the start, however, over a number of years the actual value will diminish with inflation.

        Escalating Annuity

        These types of annuity counteract the issues faced by level annuities as the income payouts are allowed to rise each year either by a set amount (usually 2%-3%) or in line with the Retail Price Index (RPI) in order to protect your retirement fund against the long-term effects of inflation.

        Value protected Annuity

        These types of annuities will pay back any remaining pension funds to your estate less any income you have used during your lifetime. If you have already taken out more income during your lifetime than the original purchase value then no money will be returned.

        Deferred Annuity

        As the name suggests, a deferred annuity allows you to choose a point in the future when you would like to begin receiving your income rather than straight away. The time between purchasing your annuity and taking your income is known as the deferred period.

        This guide offers a more in-depth look at the different types of deferred annuities available. Alternatively, if you’d like to know more, give us a call on 0808 189 0463 or make an enquiry.

        Short term Annuity

        Short term annuities are a variation of a fixed term annuity where the set period is usually no more than five years. A proportion of your pension fund is used to provide a guaranteed income during this set period whilst the remainder is invested for growth.

        Once the term is complete, you can use the remaining value of your pension fund to purchase another annuity.

        What is the best type of annuity to buy for someone who is in poor health?

        Standard annuity rates are based on average life expectancies for both males and females in the UK. However, enhanced (or impaired) annuities are available for anyone who suffers from a particular health condition which could impact upon how long they live.

        These types of annuities provide higher rates, therefore, pay a larger amount of income during the lifetime of the policy.

        If any of the different types of annuity mentioned above are of interest to you and you’d like to receive more information, give us a call on 0808 189 0463 or get in touch and we can arrange for an advisor we work with to contact you directly.

        What type of annuity is the best for my retirement?

        With so many different types of annuity available, finding the best one for your retirement can be tricky as each of us may have contrasting requirements. It’s important to remember that once you purchase an annuity you cannot change your mind.

        There are a few questions you need to consider before you make your choice, such as:

        • Do I want to guarantee my retirement income for a set period of time rather than indefinitely?
        • Would I prefer my annuity income to increase over time or remain the same?
        • What would I like to happen to my remaining annuity fund when I die?

        This is where we can help. The advisors we work with can help explain, in more detail, all the different annuity types so you can make an informed decision as to which option is the best for your retirement.

        Give us a call on 0808 189 0463 or make an enquiry and we will arrange for an expert to speak with you.

        What other options, besides annuities, are available to me?

        Using your pension fund to purchase an annuity is no longer compulsory and isn’t the right solution for everyone. In fact, many people only choose this option in extreme circumstances, such as life-limiting illness.

        The other main option available to you is pension drawdown.

        Unlike annuities, pension drawdown plans do not provide a guaranteed income for life, however, they do offer a greater degree of flexibility regarding withdrawals and are much more reliant on the investment performance of the underlying assets.

        Once all of the initial investment from your pension funds are used, including any additional growth, your income will stop. If you prefer, you can allocate money from your pension fund to purchase both an annuity and an income drawdown plan.

        Speak to an annuities expert

        As you get closer to retirement, it’s important you begin to plan ahead by considering all of the options available to you and your pension fund so you can find the most suitable product(s) that can best cater for your income requirements.

        The advisors we work with can help you find the most appropriate retirement plan best suited for your own personal circumstances. All advice is free and any information is always given in the strictest confidence. Call us on 0808 189 0463 or make an enquiry to get started.

        Ask A Quick Question

        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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        Richard Angliss

        Richard Angliss

        Finance Expert

        About the author

        Richard Angliss has made a career in financial services which stretches over 40 years.

        His early career was spent learning about the various financial products and applying them to prudent advice, working for one of the largest life assurance and investment firms. After that he joined the financial services arm of a very well-known firm providing independent advice to their 8 million customers.

        For the last 20 years he has been involved in building software solutions that help Advisers and clients work together to achieve good financial outcomes and helping to set up three independent advisory firms. He also has written many articles for financial services publications and provided commentary for newspaper journalists.

        At an early stage in his career he realised the great satisfaction that comes with being able to help people achieve their goals and protect their families. “Regulation of financial services has hugely impacted on ensuring people get appropriate advice. The issue these days is access to that advice and just as importantly regular reviews to make sure that everything stays on track”.

        With the growing development of online resources such as Online Money Advisor he sees a great future for people to access advice to make their pension and investment work harder for them.  Plus, of course, to ensure they have insurance products in place that will be required when unforeseen events happen.

        He knows getting that balance right is crucial to prudent financial planning and the wellbeing of individuals and their families.

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