Annuity 

Why annuities are an essential tool for clients' financial future

  • Describe why clients' retirement income needs are changing and how the annuity market has developed.
  • List the different types of annuities including lifetime, enhanced and fixed term.
  • Identify the importance of advice in the annuity market and why annuities can be an essential tool for clients.
CPD
Approx.30min
Why annuities are an essential tool for clients' financial future

According to the Office for National Statistics, in just 20 years’ time the UK’s population is predicted to hit 74m – 18 per cent of that population is set to be people aged 65 and over.

Planning for the future has never been more important, particularly when considering the options available to help provide peace of mind and financial support in retirement. 

This is where financial advisers play a key role. By helping those aged 55 and over to make informed choices about retirement planning, particularly when it comes to understanding and purchasing annuities, advisers can help retirees plan their financial futures.

The annuities market has experienced a lot of change over the last few years following the introduction of pension freedoms in 2015. Since then, the market has started to settle and rates are increasing, making annuities an attractive option for retirees. 

For the right client, annuities can provide the assurance and peace of mind of a regular, guaranteed income in retirement.

They can also provide financial security for any dependants, if that is what the client wants.

For those with medical conditions or certain lifestyle choices, annuities can also be enhanced to offer a higher rate of income, providing the right health information is captured at the outset.

It is worth remembering that an annuity may not always be the right choice for every customer, but by not including these important products in the retirement toolkit, advisers could be missing a trick.

Lifetime annuities 

Lifetime annuities do pretty much what they say on the tin – provide a guaranteed income for life in exchange for all or some of the money in a pension pot.

To buy our lifetime annuity, your client must be 55-years-old or over and have at least £5,000 to invest after withdrawing a tax-free cash lump sum and paying any adviser charges if applicable. 

There are a number of different options to consider when taking out an annuity and each of these will affect how much money is paid out as an income. Explaining this clearly to a client is key, so that they understand what they are getting and when they will get it.

The ways in which money can be taken from an annuity are: 

  • A tax-free lump sum – up to 25 per cent of the pension fund can be taken as a tax-free lump sum. However, it can only be taken at the start of the annuity, not later. 
  • A fixed income – the same amount of money is received each month, quarterly, six months or yearly for the rest of their life. 
  • An increasing income – the level of income increases by a fixed percentage each year for the rest of their life.
  • Inflation-linked – the starting level will be lower, but will rise in line with the Retail Price Index (RPI), or RPI, capped at 5 per cent (known as limited price indexation) every year.

Catering for dependants 

If a client wants to make sure their spouse, registered civil partner or financially dependent partner is looked after when they die, there are options available to make sure they continue to benefit from that income.

For example, a joint annuity will ensure that they receive an income for as long as they live, or for a fixed term if the named financial dependant is a child.

This will usually mean that your client will need to accept a lower monthly income while they are alive, and they will need to take numerous factors into consideration – for example, whether their spouse has a pension or annuity of their own.

CPD
Approx.30min

Please answer the six multiple choice questions below in order to bank your CPD. Multiple attempts are available until all questions are correctly answered.

  1. For the right client, annuities can provide what?

  2. There are four ways in which money can be taken from an annuity. Which one of the below is not one of those four ways?

  3. A guaranteed minimum payment period offers a term of up to 30 years from the date the annuity starts, with the maximum age at the end of the term being what?

  4. True or false? "An enhanced annuity works on the basis that certain diseases and lifestyle choices will lower the life expectancy of the annuity holder, so they will receive a higher rate of income over the life of the annuity."

  5. The main benefit of a fixed-term annuity is that it is more what than a lifetime annuity?

  6. According to research, what percentage of over-55s could accurately describe an annuity?

Nearly There…

You have successfully answered all the questions correctly, well done!

You should now know…

  • Describe why clients' retirement income needs are changing and how the annuity market has developed.
  • List the different types of annuities including lifetime, enhanced and fixed term.
  • Identify the importance of advice in the annuity market and why annuities can be an essential tool for clients.

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