What is a lifetime annuity?
An annuity is an income for life purchased by an individual in exchange for a lump sum commonly built up through a pension scheme.
The amount that you are paid as part of your regular income is dependent on the estimation of how long you will live, the annuity rates, and the size of your pension fund.
Investment backed annuity (with profits)
A with profit annuity is similar to a lifetime annuity in that it is simply a series of payments made at selected intervals in return for a pension fund. The level of payment is also dependent upon age, sex, annuity rate, size of fund and options selected. The main difference is that the initial pension level and future income levels are also dependent on the performance of the underlying with profits fund.
An assumed future bonus rate (ABR) is selected at outset by the investor. The higher the ABR the greater the initial income, however if the actual bonus rate of the with profit fund does not equal the ABR then the amount of pension payable will decrease. Most with profit annuities offer a minimum guaranteed level of pension.
Investment backed annuity (unit linked)
A unit linked annuity is very similar to a with profit annuity in that it has all the same options and features but is invested in unit linked funds rather than a with profits fund. The initial pension and future income levels are also dependent on the performance of the underlying unit linked funds.
Often the investor is allowed to assume a future rate of growth. The higher this assumed rate the greater the initial income, however if the actual growth does not match this rate then the amount of pension payable will decrease.
Temporary annuities match a guaranteed annuity with a Drawdown Pension. They have many of the same benefits of drawdown without the investment risk. Income is usually set from the outset over a set period (e.g. 5 years or more) or longer period, and you are given a guaranteed amount at the end of the plan term, so that you can calculate the investment return from day one.
What are the advantages of an annuity?
- Provision of a regular income upon retirement
- A choice of annuity options to suit your needs
What are the disadvantages?
- Lower rates on annuities for women (although unisex rates were introduced from December 2012)
- Annuity rates could be low when you retire
- Annuities are not flexible – once set up , the annuity can not be changed
- Tend to offer less death benefit than Drawdown Pension.
The advantages and disadvantages could also depend upon the type of annuity you select. We are here to assist and to ensure that you get the one that best meets your needs and circumstances.
If you do decide to buy an annuity upon retirement, you should ensure that you check policies, rates, restrictions, and benefits very carefully. Investing in the wrong annuity could cost you a great deal in annual income, so make sure that you look into this subject carefully before you make any commitment.
HCR have a dedicated team of Independent Financial Advisers (IFA) who can ensure you are receiving the right financial advice and the highest standard of service.
For a free consultation to discuss your Options at Retirement together with any other financial needsContact Us today
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