A nnuities - insurance polices which pay an annual income for life in exchange for a lump sum - have fallen out of favour since pension rules were liberalised in 2015. Annuity.
But they still play a vital part in retirement income planning. For many, they are simply a form of insurance against the financial peril of living longer than you expected.
Rates have been in decline for many years. But in recent months they have improved slightly, so that a £100,000 lump sum could buy an annuity paying a 65-year-old £5,084 a year for life.
That's today's best rate. Offered by Legal & General the quote is for a healthy customer and only covers their own life, not that of a partner. The annuity is a fixed amount, and will not increase in line with rising prices.
Hodge Life will pay a flat £4,292 a year covering two lives (with the payment falling to two thirds after the first death). This assumes two people aged 65 and 60 and has a five-year guarantee on payments.
Rates hit record lows following the vote to leave the EU in June 2016. They have since rebounded but remain on a downward trend.
Since April 2015 far fewer annuities have been sold because the "pension freedoms" reforms allow savers to take their pension as cash or keep the money invested and draw down an income.
However, for cautious investors or those relying on their pension to fund their retirement they can be extremely valuable.
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See below for the best buys, according to Retirement IQ, a consultancy.
A few months before you retire, your pension firm will send you a “wake-up” pack telling you the value of your pot and different annuity rates available. You might have several different pensions from workplace schemes, and it’s possible to trace them via a free service online or by phoning 0845 6002 537. The service will tell you which firms you have saved with, but not the amount or where it is invested.
Research by the City regulator, the Financial Conduct Authority (FCA), shows that eight in 10 people benefit by switching providers – but there is an exception. If your current provider offers a guaranteed annuity rate, fixed when you started your pension, you might find it is higher than any other offers you can find on the open market.
Do you want your spouse or partner to inherit your income? Are you happy to spend your entire pot, or do you want to keep investing? Do you want your income to rise as you get older? These are all questions you should ask before comparing different annuities.
The highest rates are paid on annuities where your pension dies with you. But you can choose a special annuity to pass to your spouse or partner. In return for a lower initial income, a “joint life” annuity – sometimes called a survivor’s pension – will be paid to a named person when you die.
Otherwise, you can guarantee your annuity for a certain number of years, so the income will still be paid after you die but only until the end of the specified time-frame.
A conventional annuity will pay you a predictable income no matter how the financial markets perform. Along with the size of your pension pot, your income is determined by your age, whether you take any tax-free cash first, and if you add any features, such as index-linking the income or giving it to your spouse.
If you are willing to risk more to earn more, you could pick an investment-linked annuity that converts your pension fund into an income. They carry more risk than basic lifetime annuities in return for a potentially higher income.
If you don’t fancy handing over your pension pot all at once, you can opt to use part of your pot to buy an annuity. If you want to keep on investing your fund as you get older, you can use a portion of your savings to buy an annuity while keeping the rest invested in a pension wrapper. Or you could take your 25pc tax-free lump sum and use the rest to buy an annuity.
You can pay for financial advice from a qualified adviser ( check their credentials ), although this can be costly and may not be worth it if you have a small pension pot of around £10,000 or less.
Free guidance is available from the state-run information service Pension Wise. You can book a free appointment with a pension guidance specialist to talk through your options.
Before recommending an annuity, advisers and pension providers should find out about your health and individual and family needs.
O ne-in-three savers are eligible for a bigger payout due to poor health or bad habits. It’s time to be honest about your fitness, smoking and drinking. So-called “enhanced annuities” offer better value than a conventional annuity to people with long-term illnesses, as well as smokers, those with high cholesterol or the overweight.
More serious health conditions such as cancer, multiple sclerosis or stroke, may qualify for an “impaired annuity” where you receive additional income as you may have limited life expectancy. Give full details of your health when asking for a quote.
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Step 4: Compare annuity rates to get the best deal
Once you’ve decided on the annuity type that’s right for you, shop around using a free comparison tool. The Money Advice Service or Age UK offer comparison services and are independent of the firms which sell annuities. Be aware that these don’t show every supplier. Some might have exclusive deals in place, or newer firms may not have uploaded their details to the website yet.
When shopping around, watch out for pension scams. Criminals interested in cheating savers of their pension pots are likely to cold-call people who are about to retire, offering investment schemes that are not covered by the regulator, bogus annuities, or claims that you will be able to access your pension before the age of 55.
Once you have compared rates across a wide range of companies, having given full details of your health and your preference for single or joint income, it’s time to choose. You can buy an annuity direct from an insurance provider or you can go through a licensed insurance agent, an annuity broker or a financial adviser.