What are the different types of annuity?

>

There are a range of annuity options available depending on your needs, including:

Lifetime annuity

These are designed to pay out a guaranteed level of income for the rest of your life.

Joint lifetime annuity

This type of annuity is not only designed to provide you with a regular income for life, but will continue to pay an income to your spouse or partner when you pass away. Due to the nature of this type of annuity, it is likely to reduce the starting level of your retirement income.

Fixed-term annuity

Fixed-term annuities will pay out a guaranteed level of income for a set amount of time, otherwise known as the ‘guarantee period’.

Level annuity

The income you will be paid through a level annuity will never change. While this may mean you are able to secure a higher income initially, it could leave you vulnerable to inflation and erode the value of your income over time.

Inflation-linked annuity

An inflation-linked annuity is designed to ensure your real-terms income remains the same throughout your retirement. Because your income is designed to rise in line with inflation, however, the initial amount you receive may be lower than if you opted for a level annuity.

Enhanced annuity

You may be eligible to receive a higher guaranteed income if you have been diagnosed with an illness or condition that may limit your life expectancy. This is called an enhanced annuity and may be available if you have a health problem such as (for example) cancer, diabetes, multiple sclerosis or stroke. You may also be eligible for a higher annuity rate if you are overweight or a smoker.

The pros and cons of buying an annuity

When it comes to your flexible pension options, what works for other people may not work for you – and vice versa. Here, we have outlined some of the advantages and disadvantages of annuities to help you decide.

Pros

  • The income from an annuity is guaranteed, so you won’t have to worry about running out of money.
  • There are a broad range of annuity options, enabling you to select the one that best suits your circumstances.
  • If you live multiple decades after purchasing the annuity, your insurer may pay out more than was originally in your pension pot.
  • If you have a health condition, you may be eligible for a higher level of income.
  • If your spouse/partner does not have adequate pension provision, a joint life annuity will ensure they are provided for when you are no longer around.
  • Unlike other flexible pension options, like drawdown, your pension funds won’t be subject to investment risk.

Cons

  • Annuities are less flexible than other options, such as drawdown. There is no way to vary your monthly payments, nor can you withdraw more or less money according to your needs.
  • Once you have purchased an annuity, there is no going back or possibility of a refund. You must be sure that this is the right course for you before proceeding.
  • If you were to die a week after buying your annuity, your insurer would take the rest of the money. This could potentially leave you with little to nothing to pass on to your family.
  • The income you receive is dependent on current annuity rates, which have reduced in recent years.
  • With most annuities, there is no potential for future investment growth.