Lifetime Annuity

A lifetime annuity is an income stream bought from an insurance company with a pension fund.      

When calculating their annuity rates the provider takes account of the fact that some people live longer than others.  People who live longer than average will take more from their annuity than someone who dies shortly after retirement.  In effect, people who die early subsidise the annuity rates for those who live longer.  

Insurance companies periodically adjust rates because average life expectancy is rising.  Interest rates also affect annuity rates because insurers base their rates on the return they get from investments and their desire to attract capital.  

Once you buy an annuity you lock into an annuity rate. You will not be affected if rates fall, but neither will you benefit if rates increase.   

The amount of income an annuity pays depends on, among other things:      

• the size  - of your pension fund after taking the tax-free lump sum;      
• your age  - t  he older you are when you buy an annuity, the higher the income you get at the start. This is because, on average, an older person has fewer years left to live than a younger person.          

Take care if you are thinking of delaying buying your annuity to get a higher rate. 

• If you are a male aged 65 and delay taking your income by one year, your income may increase by 2.55 %. You will however, need to live to age 105 years before this additional income will replace the income forgone. (May 2009, annuity rates). 
• If you are female aged 60 and delay taking your income by one year, your income may increase by 1.8 %. You will however, need to live to age 117 before this additional income will replace the income forgone. (May 2009, annuity rates)  

• where you live  - this is because, on average you have a greater life expectancy in some areas of the country, which would reduce the annuity rate offered.  
• your sex  - usually the annuity rate offered to a man is higher than for a woman of the same age. This is because all else being equal, a woman is likely to live longer than a man of the same age.     
• your health  - some companies offer annuities that pay you a higher-than-normal income if you have a health problem that threatens to reduce your lifespan, or smoke regularly.       
• the benefits you choose  - such as whether the annuity is escalating, for you, or you and your partner.       
• contracted out  - whether you have used your fund to contract out of the additional State Pension.     

Single-Life & Joint-Life Lifetime Annuities  

Basic lifetime annuities can be  single life  or  joint life  . Unless there is a guarantee, a single-life annuity will only pay out during your own lifetime. 

A joint-life annuity continues to pay an income to your partner after your death. You can usually choose between a joint-life annuity that pays your partner the same as you were receiving, or two thirds or a half of what you were receiving.   

Joint-life annuities are more expensive than single-life annuities because the insurance company will expect to pay the annuity for longer.  

Level & Escalating Lifetime Annuities  

A  level lifetime annuity  pays the same income year after year for the rest of your life(s).  What you can buy with the income from a level annuity falls as prices rise.  To protect the value of your income from inflation you can choose an  escalating lifetime annuity  which pays a lower initial annuity but then increases each year.   

fixed-rate escalating annuities  – your income is guaranteed to increase at a fixed rate each year, say, by 3%;    

RPI-linked annuities  – your income is adjusted each year to reflect changes in the Retail Prices Index (RPI), so will rise and fall. 

• Male  - with an escalating annuity, the starting income is a lot lower than you would get from a level annuity. It would take around 11 years for the escalating annuity to catch up with the level annuity. You would need to live for 20 years for the total received from the escalating annuity to reach amount paid out by the level annuity,  (May 2009, annuity rates).  
• Female  - with an escalating annuity, the starting income is a lot lower than you would get from a level annuity. It would take around 14 years for the escalating annuity to catch up with the level annuity. You would need to live for 25 years for the total received from the escalating annuity to reach amount paid out by the level annuity,  (May 2009, annuity rates).     

Protected Rights Annuity  

If you have contracted out of the  additional State pension, known as the State Second Pension (previously called the State Earnings Related Pension Scheme or SERPS), and put your rebates into a personal pension fund, you must use that part of your pension fund to buy a  protected rights annuity  .  

Your pension provider will tell you if protected rights applies to you and what it means in your circumstances. With a protected rights pension you:  

•    can take your protected rights pension at the same time as your occupational or personal pension, provided you are over 50 years old and your pension scheme rules currently allow you to take your pension at age 50. This lower age limit will be going up to 55 by 2010;      
• can convert up to one quarter of your protected rights fund into a tax-free lump sum;      
• will have to buy a joint-life annuity paying a 50% spouse’s pension if you are married or have a civil partner;      
• can choose between taking a level or escalating annuity.     

Annuity Guarantees  

If you die soon after buying an annuity, it will not have paid out much. To avoid this, you can buy an annuity, with a guarantee period.  Guarantee periods are usually for five or ten years’.  If you die within the guarantee period the income will continue to be paid for the balance of the guarantee period.  

Annuity protection lump-sum death benefit   

You can ensure that if you die before the age of 75 your money doesn’t die with you by taking out an annuity protection lump-sum death benefit. A lump sum equivalent to the pension fund you used to buy an annuity, minus the income you have received, will be paid to your estate or beneficiaries. There will be a tax charge and may also be an inheritance tax charge on this payment.   

Investment-Linked Annuities  

Investment-linked annuities put your pension fund into investments, such as stocks and shares. This means that you could continue to benefit from stockmarket investments

after retirement.  Investment-linked annuities can be either:

• unit-linked  - you will be linking your income in retirement to the ups and downs of the stockmarket instead of receiving a pre-set income. You can usually choose a fund to match your risk profile, as your income is linked directly to the funds you have invested in.   
• with-profits  - your pension fund is invested in an insurance company’s with-profits fund. Your income is linked directly to the performance of this fund.    

Annuity Summary  

The inclusion of guarantees, capital protection, payment escalation or a spouse on the annuity will each reduce the initial income you get from your annuity.     

If, however, you die shortly after buying the annuity the inclusion of some of these benefits could significantly increase the value that your estate receives from the annuity.  

You do NOT have to buy your annuity from the same company you saved with, as you are free to buy an annuity from a life insurance company of your choice.        Failing to shop around, to get the best annuity could cost you thousands of pounds, each year!   

We are happy to work with you to get the right type of annuity - at the best rates!