Buying an Annuity (Secured Pension)
If you are a member of a money purchase pension scheme (i.e. an occupational money purchase scheme, a stakeholder pension scheme or a personal pension plan), then your regular pension contributions are used to build up a 'pot of money', which is used wholly or in part to buy an annuity when you retire. This annuity provides you with regular income payments for the remainder of your life, paid monthly, quarterly, half-yearly or annually.
How Much Will You Receive?
The income you receive from an annuity depends on the size of your pension fund and the annuity rate offered by the insurance company selling the annuity. The annuity rate is calculated by actuaries using a number of factors, such as age, gender, mortality, interest rates, and sometimes health. In general terms, the longer you are expected to live, the lower the annuity rate. For example, women get lower annuity rates than men of the same age as they have a higher life expectancy.
Types of Annuity
If you are buying an annuity, you must choose which type suits you best.
Level Annuity
With this variety of annuity, your regular income payments are fixed when you retire, and continue at the same level until you die.
Escalating Annuity
Also known as an increasing annuity, an escalating annuity increases your income every year by either a fixed rate (e.g. 3%) or a rate that changes in line with the cost of living - the Retail Prices Index (RPI). With this type of annuity, it is more than likely that your annuity payments will initially be less than that available from a level annuity.
Enhanced Annuity
Also known as an impaired life annuity, an enhanced annuity pays a higher rate if you have a medical condition that is likely to affect your life expectancy. For example, if you have cancer, high blood pressure or diabetes, then you may get a higher income from your annuity.
Unitised Annuity
Also known as an investment-linked annuity, the payments made by a unitised annuity is linked to an investment fund (or funds) that is typically managed by the annuity provider. As the payments are investment linked, there are no guarantees - your pension income could go up or down.
There are a number of types of annuity on the market, and once you've bought one, you may not be able to change it later on.
Other Annuity Options
Before buying an annuity, you should be aware of all the options available. For example:
- Some annuities will continue to be paid to your spouse, partner or dependant(s) following your death.
- Some annuities are guaranteed for a minimum period (for example, 5 or 10 years) even if you die before that period ends.
- Some annuities may offer you the option to change the plan type at a later date.
