Your Essential Guide to Buying Annuities in the UK

Increasingly, new retirees are able to access their pension pot as a lump sum rather than as a steady income. This offers them the opportunity to use a proportion of the money immediately, then invest the rest to provide an income for their future years. However, with this benefit comes a good deal of effort and responsibility to be exercised while choosing investment options.

This essential guide to buying annuities in the UK will help you work through the options available to you.

What Is An Annuity?
An annuity is a financial product that is paid for as a lump sum, and in return the investor receives a fixed annual income for the remainder of their life.

Why Do People Buy Them?
Without annuities it would be very difficult for retirees to pace their annual spending to match their assets. Imagine having access to a large sum of money, but you have no idea what age you will live to. How would you judge how much to spend each year?

An annuity exchanges that lump sum for a fixed annual income. The investor now knows what their income will be in the coming years and can make financial plans accordingly.

It is not necessary to invest the entirety of your pension payout into an annuity. Many people choose to keep a proportion back for spending on luxuries such as holidays, or necessary home improvements like buying a Britain's Original Stairlift. However, reducing the amount of money you invest in your annuity will reduce the annual income payment you receive.

Choosing An Annuity
As you near retirement age your pension provider will most likely offer an annuity to you. You can accept their offer if you would like to, but you are not obliged to. For many people shopping around will help them locate a better deal, providing a greater annual income for the same investment, or the same income for a smaller investment than the product offered by the pension provider.

There are many different types of annuity product available and once you've made your purchase there's no going back, so it's important you get the decision right first time.

Choosing the right annuity for you involves matching your needs against the many options available.



What Are Your Financial Needs?

The first step is to get clear about what you need.

To get started ask yourself these questions:

In the event of your death will you be leaving behind someone who is currently financially dependent on you?

Do you enjoy good health? How many years is the annuity likely to be needed for?

Have you retired at an early age with many years left to fund?

Do you have income from other sources to supplement the annuity?

Do you have income currently from a part-time job which will enable you to delay the start date of the annuity?

Do you want the income to remain level, or would you like it to increase as you get older. For many people expenses increase as they age. Purchases like mobility scooters, and stairlifts alongside the cost of personal care can represent a significant increase in expenses.

Will you be making an one-off investment or can you continue to invest in the fund after you retire?

Would you like to make a lump sum inheritance available to a beneficiary upon your death?

Finding An Annuity Provider
Annuities are available from pensions providers, insurance companies and other financial providers. You can research them yourself or enlist the help of a third-party. This third-party can be a professional adviser or a non-advised broker.

You can use a professional adviser to find the best annuity for your needs, and they will make all the practical arrangements regarding money transfers, in exchange for a fee. Alternatively you could use a non-advised broker, whose role is to provide information rather than direction. This route is cheaper, but you will required to conduct much of the research and compare your annuity options yourself.

Allow yourself plenty of time to research your options and make your investment decision.

You can begin your preparations around five months before your retirement date, which is when you will be sent the information you need by your pension provider. If you have not heard from them by the fourth month prior to your retirement, it is important you chase them for information.

Your pension provider will send you details on the estimated value of your pension fund, and approximately what annual income you can expect to receive throughout your retirement if you choose to buy a lifetime annuity from them. This figure provides a good starting point from which to judge your alternative options.

How Much Income Will You Get From Your Annuity?
The income you receive each year from your annuity will depend on the size of the lump sum initially invested, and the annuity rate you secure at the time. This rate will not go up or down over the course of your retirement, it is locked in.

The annuity rate is dependent upon:

The national economy, as annuity rates are influenced by interest rates

Your age. The younger you are when you retire the less income you will receive each year

Your life expectancy, based on population trends

Your gender, as women are expected to live longer than men

Your health. If you have serious health issues you may be offered a higher income

The value of your investment. Some providers encourage larger investments by offering better rates to those who spend more on an annuity

The type of annuity you choose, for example if you need to secure the financial future of a dependent

Different providers will offer different rates even when presented with the same set of information. This is because each provider will be targeting a different subset of customers. As with any financial product, it pays to shop around to find the best deal.

Looking After Financial Dependents

A single lifetime annuity will pay an annual income until you die. This can secure your financial future for the rest of your life, but what if you have a spouse or child who is financially dependent on you? Many retirees need an annuity that will provide an income not just for them but for their loved ones too.

A survivor's pension, or joint lifetime annuity will continue to pay an income to a partner after you die.

When choosing a joint lifetime annuity there are a few important points to consider:

Some providers will not offer this product if your partner is more than ten years younger than you

The annual income you receive will be reduced as the pot of money needs to stretch out for a longer period of time

The amount of money paid annually after your death will usually decrease. You need to look carefully at how much income your partner will need when choosing your best option

The annuity rate you will be offered will not only be based on the factors detailed above, but also on your partner's age, health, lifestyle and the amount of income you would like them to receive

Level vs Increasing
A level annuity pays the same amount of money each year and offers more income initially than an increasing annuity purchased with the same value lump sum.

If you are expecting to live well into old age, an increasing annuity may be a better choice. As the income paid increases year on year, it can help with the rising cost of living due to inflation, and increasing costs due to care needs and limited mobility.

Playing The Stock Market
An investment-linked annuity does not pay a fixed income. Instead the value of the annual payout is linked to the performance of various investments. These are only suitable if you have a very large amount of money to invest, or some other form of regular income to ensure you are still able to meet your financial obligations in the event of a poor investment year.



Making sound investment decisions for your retirement is a complex and time consuming process. There are many places able to offer advice for free, for example your current pension provider and the Citizen's Advice Bureau. For more in-depth advice tailored to your particular circumstances, many soon-to-be-retirees find professional advice to be a worthwhile investment. Whichever route you choose, careful planning and consideration is the key to successful financial decision making.

Harold H Rigby is an experienced blogger with a special interest in the lifestyles and finances of the newly retired.