Put simply, says Dean Mirfin, group director at Key Retirement Solutions, an annuity is a regular income paid for the remainder of a client’s life in return for the lump sum they have built up through their pension scheme.
“It is like a reverse of a repayment mortgage,” suggests Alan Higham, chairman of Annuity Direct.
An adviser’s guidance is significant, as Mr Mirfin stresses making the right decision is vital.
“The point to remember is that clients buy annuities with their pension fund in order to secure an income. It is a one-off decision which they literally have to live with so it is important to get it right.
“People can live for 30 years or more after buying an annuity and the deal they get on their annuity purchase will be the income they have to live with. So of course you should investigate all different types of annuities.”
In terms of the type of annuities available, Stephen Lowe, director of external affairs at Just Retirement differentiates three key offerings.
“The main choice comes between guaranteed annuities - standard or underwritten - investment-linked annuities, or fixed-term annuities.
“Guaranteed annuities provide certainty that income will be payable for life as contracted with the provider at outset. Investment-linked annuities retain investment exposure, with the potential for higher income in return for the investment risk that the clients retain.
“Fixed-term annuities are not strictly annuities, but provide the ability to select a level of income for a short period... with a fixed guaranteed maturity amount at the end of this term.”
The income from an annuity can be paid monthly, twice a year or annually.
Generally the following considerations should be taken into account when advising on annuity choice:
• Over what term should the annuity be taken? Lifetime annuities can be linked to the lifetime of both the policyholder and any adult who is financially dependent upon them. Fixed-term annuities guarantee an income for, say, four or five years, at the end of which clients receive their fund back minus payments paid and any investment gains which they can use to buy another annuity.
• Should payments be guaranteed or investment-linked? Guaranteed annuities can be level or can increase at a fixed rate or based on an inflation index and can be reviewed after a set period. Level lifetime annuities pay the highest income upfront.
• Are the funds to be sourced from a pension or other investments? This does affect the tax treatment.
• Are the proceeds being used for general income or assigned income, such as for long-term care fees?
• Are there any medical and lifestyle conditions that would mean the individual would be better served with an enhanced annuity? Most insurance companies do not offer underwritten annuities, so those that do have seen strong growth in new business.
