Annuities

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Converting money from pension pots into lifetime income.

The traditional annuity has been the retirement vehicle of choice in the UK for several decades. Annuities offer those in retirement an opportunity to convert money from their pension pots into lifetime income enabling them to pay their bills and easily budget. You may find that an annuity is an excellent option for you at retirement.

Pensioners should always keep in mind that annuities are not the only option out there. In fact, new pension rules implemented in spring 2015 immediately made it possible for pension savers to begin accessing money in their pots at age 55, without experiencing penalties and punitive taxation. This greater freedom has led a number of pension savers to seriously consider whether an annuity is the best choice or not. For many, it is.

The Annuity Defined

Annuities are here to stay, despite pension reforms. Simply put, annuities are very good instruments for a large number of people entering retirement. To help you understand this better, we need to define what an annuity is.

An annuity is a financial instrument offered by an insurance company, bank, or other financial services sector business. It is a financial instrument that a customer – in this case, you – would purchase using the money in your pension pot. Once purchased, the annuity pays you a regular income based on the parameters you and the provider agree to. You are, in essence, using the money in your pension pot to purchase a guaranteed amount income for the rest of your life.

An annuity benefits the purchaser inasmuch as he or she has the peace of mind that comes with knowing guaranteed income will always be there. It benefits the provider by allowing them to earn a profit on the monies used to purchase annuities. If both sides in the transaction make wise decisions that are mutually beneficial, both will do very well with the annuity.

Why Providers Offer Annuities

You may find it difficult to understand why an annuity provider would offer such a financial instrument. After all, the total amount of income you might receive during your retirement years could, in theory, exceed the total amount you paid for the annuity. That is not a problem for providers. The money you use to purchase the annuity is then invested by the provider with the understanding that the profits from those investments will be greater than the amount of money they will pay over the life of the instrument.

Annuity providers do very well by pooling the combined monies of all their customers into large, institutional investments. Such investments earn them enough profit to make scheduled payments without a problem. Moreover, because they are gradually paying back what was purchased by the customer, they have plenty of time to make investments work.

As you can see, the annuity benefits both you and your provider mutually. We urge you to consider purchasing an annuity for retirement income when you are ready to stop working. And please shop around. Just like bank accounts and insurance policies, annuities can vary significantly from one provider to the next. If you are ready to shop now, we can help. Contact us right away for a free, no-obligation annuity quote at competitive rates!

How to purchase an annuity.

The process of purchasing an annuity does not necessarily have to be complicated. Some pension providers make it more difficult than it needs to be, but never forget that you have rights as both a pension saver and the consumer. You do not have to settle for what your pension provider offers. In fact, you should not. You will have a good 6 to 8 months before retirement to learn everything you can about annuity options. It is a good idea to do so.

Here is a brief outline of the process of purchasing an annuity. Keep in mind that your pension provider may do things somewhat differently.

  • First Contact – Within 6 to 8 months of your pending retirement, your pension provider will contact you to make you aware of your options. This is usually done through the post, and includes a package of information that explains what your pension pot is worth, what they expect it to be worth when you retire, and your options for accessing the money. Your provider is required by law to provide accurate information about any annuities they offer.
  • Follow-Up Contact – About 10 to 12 weeks out from retirement, your pension provider will contact you again to follow-up with you. This second contact is intended to make sure you understand how important it is for you to make a decision regarding your pension funds. Pension reform has made such decisions even more important than ever.
  • Financial Advice – Somewhere between the first and follow-up contacts, the future pensioner should sit down with a certified financial advisor to go through the options. The advisor will take into consideration a number of factors including age, sex, marital status, income, etc. If a saver chooses not to use the financial advisor, the pension provider is obligated at some point to collect the information and offer a reasonable forecast for each of their annuity options.
  • Shopping Around – With or without the help of a financial advisor, the consumer should begin shopping around for annuities within the 10-week window. The choice to buy a particular annuity product should not be made until the last few weeks before retirement. Things change frequently enough that you do not want to make a decision too early.
  • Annuity Purchase – Once the consumer has completed his or her research and made a decision, he or she informs the pension provider who will, in turn, provide the necessary documentation. If the consumer purchases an annuity offered by the pension provider, the process is very simple; the provider handles everything. Buying an annuity elsewhere will require the consumer to fill out an application requesting funds to be released. Money will then be transferred to the annuity provider within 30 days.

The idea here is to begin researching annuities with 6 to 8 months to go before retirement. However, one should not make a final decision until a few weeks from retirement. Waiting ensures the best possible deal at the time the transaction occurs.

Guaranteed Annuity Rate

There is one instance in which it might not pay to shop around: your pension provider offers you something known as a 'Guaranteed Annuity Rate' (GAR). Such rates tend to be significantly higher than what most people can get from other providers, making them a veritable steal. If your pension provider offers a GAR, find out what it is and run it past your financial advisor. He or she will likely tell you to jump on it right away.

If you are ready to shop around for annuities, contact us now to get an annuity quote without any obligation!

Which annuity product should I buy?

The most difficult thing about purchasing an annuity is determining which type of instrument to buy. There are numerous choices, each with its own parameters you may find appealing. The most common annuities are listed below; please seek advice from an experienced advisor if you need help understanding them.

  • Level Annuity – The level annuity is the most basic kind of annuity and the easiest to understand. It pays you a set amount of money, on a weekly, monthly, or annual basis, for the rest of your life. That amount will never change. The main advantage of the level annuity is higher payments at the start; the disadvantage is that inflation reduces the value of the payments over time.
  • Escalating Annuity – Consumers looking for an annuity that keeps pace with inflation will prefer the escalating annuity. Payments are lower than the level annuity to start, but they rise with inflation. An escalating annuity is only a good choice when inflation hovers between 2% and 3%. Anything lower means you will not get your money's worth.
  • Single and Joint Life – Both of these annuities relate to how money is paid out upon your passing. A single-life annuity pays out only to you through until the end of your life. A joint-life annuity continues paying to your spouse or partner after you pass.
  • Linked and Variable Annuities – Some annuities can be linked to the stock market or other types of investments. Such annuities guarantee a minimum payment that can then go up based on the positive performance of your investments. These are expensive to purchase but potentially very profitable.
  • Fixed Term Annuity – A fixed term annuity is similar to a level annuity in that the amount of money you received is fixed over the life of the instrument. The difference is this: a fixed term annuity only pays out for a certain number of years – usually five or ten. At the end of the term, the buyer receives a lump sum payout, which can then be used to purchase another annuity.
  • Enhanced Annuity – Most annuities are offered based on the average life expectancy of men and women in the UK. However, someone faced with the very real possibility of passing at an earlier age may find standard annuities not worth their investment. An enhanced annuity might be the answer. This kind of annuity pays you more every year, based on limited life expectancy. However, they are expensive, and they come with quite a few restrictions.

There are many different annuity choices for you to work with. The key is understanding what you have to work with in terms of current pension funds and future plans. The services of an experienced financial advisor are invaluable in trying to match up your current circumstances with your hopes for the future.

Make Wise Decisions

You may be among the millions of Britons who determine that an annuity is still the best choice for retirement income. If so, take your time to investigate the options, ask questions, and, ultimately, make a wise decision. The most important thing you need to know is that an annuity purchase is permanent. If you decide on a particular type of annuity only discover a few years down the road that it is not optimal, you cannot change your mind and switch to something else. So be careful.

You can contact us right away to get an annuity quote that is risk-free and without obligation. Let us help you begin the process of making your annuity decisions.

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