What is it?
An annuity is an insurance company product which is used to pay your pension for the rest of your life. It is purchased using a lump sum from your scheme. You can use your whole fund to purchase an annuity which will pay your entire pension or you can use just part of it. You can add different options and get different types depending on your needs and circumstances.
When is it available?
You can buy an annuity at any time after you have crystallised. Under rules that existed prior to April 2006, you used to have to purchase an annuity by your 75th Birthday. This is no longer the case and you can continue to draw an income directly from your scheme if you would like. These new rules mean that you do not have to buy an annuity if you do not want to.
How is your pension calculated?
The level of income an annuity pays is set by the insurance company and will depend on factors like the size of your fund, your age, your health, whether the pension will stop on your death or continue to your spouse, whether it will be level or will increase during payment and whether it will be guaranteed. Annuity rates vary from one insurance company to another, so you should make sure you shop around to get the best deal. Your financial adviser can help you with this.
What are the advantages?
The income from an annuity is guaranteed for life, which means that it cannot go down. If you have selected an escalating annuity then the increases are also guaranteed.
What are the risks / disadvantages?
The pension paid by an Annuity may be lower than the income generated from the other options (however this may be offset by the security of knowing exactly how much money you will get for the term of the annuity). Once you have purchased a lifetime annuity, you cannot change your mind if your circumstances change. The benefits available to your family may also be more limited than the benefits available if you were drawing your pension under unsecured pension (see Death Benefits below).