The Financial Services Authority (FSA) is the UK’s ﬁnancial watchdog
set up by government to regulate ﬁnancial services and protect your
rights. By law, most ﬁnancial services ﬁrms in the UK must be
authorised by the FSA. We regulate the way many (but not all) of
them do business with you.
What is a lifetime annuity? 5
The FSA’s consumer publications aim to give you general information Taking a lump sum from your 7
to help you make ﬁnancial decisions. The information does not pension
constitute ﬁnancial or other professional advice: for advice about
Basic lifetime annuities 8
your own circumstances, you should consult a professional adviser.
– Level and escalating lifetime 9
– Lifetime annuities if you have 11
If you would like this guide in Braille, large print or audio format, please
call our Consumer Helpline on 0845 606 1234 or Minicom/Textphone
08457 300 104 (call rates may vary). – How annuity rates vary according 14
to age, sex and type of annuity
Retiring gradually 16
Retiring later and postponing your 18
Investment-linked annuities 20
Where to buy annuities 23
Other retirement options 26 The FSA – here
Where to get advice 28
to help you make
more sense of
Useful contacts 31
Shop around for the best annuity rates online at www.fsa.gov.uk/tables 1
This booklet is an introductory guide that outlines the main ways of
converting your pension fund into an income for your retirement. It
is general information designed to help you ‘ask the right questions’
and so make informed decisions.
A guide to your retirement options if you are
Changes to pensions retiring soon.
In May 2006 the government published a White Paper that
This booklet is for you if you have ■ the type of additional voluntary
proposes signiﬁcant changes to both State and private pensions.
saved or are saving for your retirement contribution (AVC) scheme that
Any changes arising from these new proposals are unlikely to be
in a money purchase pension such as: builds up your own investment fund;
made in the next few years.
■ a personal pension; ■ some Section 32 policies – if you
Information in this booklet is based on the legal tax position at
have used one to transfer out of
April 2006. ■ a stakeholder pension scheme;
your employer’s pension scheme.
■ a group personal pension plan
This booklet deals with converting your
arranged through your employer;
money purchase pension fund or funds
■ a retirement annuity contract into an income in retirement. For most
(similar to a personal pension but people, this means buying a lifetime
sold before July 1988 when personal annuity.
pensions ﬁrst became available);
It does not deal with employers’
■ a free-standing additional voluntary occupational salary-related (deﬁned
contribution (FSAVC) scheme. beneﬁt) pension schemes. In these
schemes, your income in retirement is
This booklet may also be relevant if provided by the employer’s pension
you will be getting an income from: scheme and you do not need to buy
■ an employer’s occupational pension an annuity yourself.
scheme that builds up your own
retirement fund – called a money
purchase or deﬁned contribution
2 Shop around for the best annuity rates online at www.fsa.gov.uk/tables Shop around for the best annuity rates online at www.fsa.gov.uk/tables 3
Important things to think about: ■ You might be able to get a better
annuity rate for your money if you
You will have many things to consider
when you buy a lifetime annuity. It may
help if you take ﬁnancial advice. Here
smoke or have health problems and
qualify for an impaired life annuity. What is a lifetime annuity?
are some things to think about: ■ You don’t have to buy a lifetime
annuity at retirement. See page 26
■ You can choose to take up to a
for other options available to you.
quarter of your pension fund as a A lifetime annuity is a special type of People who die early subsidise the
tax-free lump sum. You can then use investment because it will pay you an annuity rates for those who live longer
Retirement income for the rest of your life, but everyone beneﬁts from the payment
the remainder of the fund to provide
you with an income by buying a In this guide, we use ‘retirement’ to however long you live. of an income throughout their
lifetime annuity. This will pay you mean when you start to take beneﬁts retirement – no matter how long or
If you have more than one pension plan
an income for life. from your pension. short that proves to be. Insurance
or scheme, you don’t have to use them
companies adjust rates because average
■ If you choose a basic lifetime You can take your pension from age 50 all at the same time to buy an annuity,
life expectancy is rising and people are
annuity, your choice will be between onwards from a personal or stakeholder though you might be able to get a
living longer. Interest rates also affect
a level annuity that will pay you the pension and you don’t have to stop better income by combining them.
annuity rates because they determine
same amount for the rest of your life, work. You can also do this with an the returns on the investments from
or an escalating annuity that will pay employer’s occupational pension scheme How lifetime annuities work which insurers pay annuities.
a lower initial amount but will and carry on working for that employer,
In most cases buying an annuity means
increase each year with inﬂation. but only if the scheme rules allow.
that you are exchanging your pension
Did you know?
■ You’ll need to consider whether you The minimum age from which you can fund for an income.
should provide for your partner after take your pension is going up from Government estimates for the UK
Lifetime annuities are sold by life
your death. 50 to 55 by 2010. The precise timing show that life expectancy for people
insurance companies. The annuity rates
may vary between different pension aged 65 in 2005 will be:
■ You should shop around to get they offer people are calculated by
schemes, so bear this in mind when
the best deal for your money. You taking account of the fact that some ■ around 84 for men; and
thinking about your retirement plans
can compare annuity rates on the people will live longer than others. ■ around 87 for women.
and check with your pension provider.
FSA Comparative Tables at Obviously people who live longer than
www.fsa.gov.uk/tables average will take more from their You could be living on your
annuity than, for example, someone retirement income for many years.
who dies three or four years after Source: Government Actuary’s Department – cohort ﬁgures 2005
4 Shop around for Check annuity rates online at www.fsa.gov.uk/tables
the best annuity rates online at www.fsa.gov.uk/tables Shop around for the best annuity rates online at www.fsa.gov.uk/tables 5
In fact, if you have an illness or medical
condition that means you don’t expect
Usually the starting income from the
same size of pension fund is higher for
Taking a lump sum
to live as long as a healthy person the
insurance company might offer you a
a man than for a woman of the same
age. This is because, on average, the from your pension
higher annuity rate than it would a life expectancy of a man is less than
healthier person. Some companies offer that of a woman of the same age.
higher annuity rates for smokers and
The older you are when you buy an
people with speciﬁed health problems Tax-free lump sum Increasing your income with a
annuity, the higher will be the income
or who have worked in certain purchased life annuity
you get from it at the start. This is You can take up to a quarter of your
industries. These are called ‘enhanced’
because, on average, an older person has pension fund in cash, as a tax-free lump It may be worth taking the maximum
or ‘impaired life’ annuities.
fewer years left to live than a younger sum. You have to use the remaining tax-free cash sum and using it to buy a
person. So an older person’s pension fund to provide you with an income. purchased life annuity (though this is
How lifetime annuities pay out
fund does not have to last so long. not always the case so take advice). A
The amount of income an annuity will Trivial commutation purchased life annuity is similar to the
You can usually choose to have your
pay depends on, amongst other things: lifetime annuities described in this
income paid every month, every three If the total of all your pension funds is
booklet. But a purchased life annuity
■ the amount you have in your months, every six months or once a year. less than £15,000, you can take all
is taxed more favourably, so can pay
pension fund; your pensions as a cash lump sum
more after tax than a pension annuity
rather than take an income. This is
■ the amount of tax-free lump sum for the same amount of money.
called trivial commutation. To take this
option you must be between 60 and 75
■ if you have used your fund to and must convert all your pension
contract out of the additional funds to cash within a 12-month
State Pension (see page 12); period. One quarter of the lump sum is
tax-free and the rest is taxed as income.
■ your health;
■ your age;
■ your sex;
■ the beneﬁts you choose, such as
whether the annuity is for you
or for you and your partner.
6 Shop around for the best annuity rates online at www.fsa.gov.uk/tables Shop around for the best annuity rates online at www.fsa.gov.uk/tables
FSA Consumer website: www.fsa.gov.uk/consumer 7
Level and escalating Example of level annuity
Basic lifetime annuities A level lifetime annuity pays the same
Harry retires at age 65 and reckons he
has a good chance of living another
income year after year for the rest of 20 years. After taking a tax-free lump
your life. sum his remaining pension fund is
£50,000. He chooses a single-life level
Before you buy a lifetime annuity you Level annuities have a higher starting annuity. This pays him around £3,400
will have to decide what type you want. income than escalating annuities but a year (£282 a month or £70 a week).
what you can buy with the income
There are different types to suit your Start thinking If inﬂation averages 3% a year, the
from a level annuity falls as prices rise.
needs and circumstances. The basic about your annuity buying power of Harry’s pension
types are: To protect your income from rising would fall dramatically as retirement
choices at least four prices, you can choose an escalating progresses. After ten years, his £3,400
■ single life – an annuity just for lifetime annuity that pays a lower initial
you if you don’t have a spouse or months before you annual pension would buy only the
annuity but then increases each year. same as £2,507 today.
partner, or if they don’t rely on you retire.
for income (for example, they have There are two main choices: Harry might be gaining in terms of the
their own pension arrangement); ■ ﬁxed-rate escalating annuities – your total amount he has received over 10
income is guaranteed to increase at years, but his income will only buy
■ joint life – an annuity that will pay
a ﬁxed rate each year, say, by 3%; around three-quarters of what it
out to your spouse or partner after
bought in year 1. After 20 years, its
your death – see page 11. ■ RPI-linked annuities – your income buying power would have fallen to
You can also choose whether you want is adjusted each year to reﬂect around £1,850 a year.
your single or joint life annuity to be – changes in the Retail Prices Index
(RPI). So, if inﬂation is 2% one year, If inﬂation is more than 3% a year,
■ a level annuity – see page 9; or your income goes up by 2%. If the buying power of Harry’s pension
inﬂation is 3% next year, your will fall even further and faster.
■ an escalating annuity – see page 9.
income goes up by 3%. However,
You can also ‘guarantee’ whichever your income is not guaranteed to
annuity you choose for a speciﬁc increase each year – if the RPI did
number of years – see page 12. not rise, neither would your income.
If the RPI fell, your income increase
would be lower than previous years.
8 Shop around for the best annuity rates online at www.fsa.gov.uk/tables Shop around for the best annuity rates online at www.fsa.gov.uk/tables 9
The examples used below and elsewhere The table below illustrates the difference
in this booklet are based on annuity between the rates for a level annuity,
Lifetime annuities if you have a partner
rates in April 2006, as shown on the and the starting rates for an annuity Joint-life annuities With some occupational money purchase
FSA Comparative Tables, and are for increasing each year by 3% and an pension schemes, you must opt for an
illustration only. annuity linked to the RPI. Basic annuities can be single life or joint
annuity that provides a pension for your
life. Unless there is a guarantee, see page
With an escalating annuity, the starting widow, widower or civil partner equal to
12, a single-life annuity will only pay
Annuity rates are changing all the income is a lot lower than you would half the income you were getting. Your
out during your own lifetime. Your
time. In general, the annuity rate at get from a level annuity. It would take provider can tell you if this applies to
partner will get nothing when you die.
the time you buy your annuity sets around 11 years for the 3% escalating your plan or scheme.
A joint-life annuity continues to pay an
your income throughout retirement. annuity to catch up with the level income to your partner after your death. Joint-life annuities are more expensive
Later changes in annuity rates do not annuity. It would take 20 years before than single-life annuities because the
affect your annuity income. the total you received from the 3% You can usually choose between a
insurance company will expect to
escalating annuity exceeded the total joint-life annuity that pays your partner
continue paying the annuity for longer.
paid by the level annuity. the same as you were receiving, or two
The table below shows the difference
thirds or a half of what you were
between single-life and joint-life
receiving. You can also choose a joint
life annuity that is level or escalating.
If you are not married, check with your
provider that your partner will be
eligible to receive the income from a
Man aged 65 with a pension fund of £50,000 buying a single life annuity Man aged 65, wife aged 62 with a pension fund of £50,000 buying a
Level Escalating 3% Escalating RPI
£ per month £ per month Level annuity
£ per month
Best rate 290 212 196 Single Joint 50% Joint 100%
Worst rate 259 180 179 £ per month £ per month £ per month
Best rate 290 260 236
Taken from the FSA’s Comparative Tables on 6 April, 2006
Worst rate 259 227 192
Taken from the FSA’s Comparative Tables on 6 April, 2006
10 Shop around for the best annuity rates online at www.fsa.gov.uk/tables Shop around for the best annuity rates online at www.fsa.gov.uk/tables 11
If you have contracted out of the Lifetime annuities with a guarantee There will be a tax charge, and may These are called ‘impaired life
additional State pension period also be an inheritance tax charge. annuities’. Relevant health problems
might include, for example, cancer,
If you have contracted out of the If you die soon after you buy an
Example of an annuity chronic asthma, diabetes, heart attack,
additional State pension, known as the annuity, it will not have paid out much.
high blood pressure, kidney failure,
State Second Pension (previously called To guard against this, you can choose with a guarantee period multiple sclerosis or stroke.
SERPS), and put your rebates into a an annuity with a guarantee period.
personal pension fund, you must use Harriet, 60, retires. After taking a tax-
You might be able to get an ‘enhanced
Guarantee periods are usually for ﬁve free lump sum she uses the remaining
that part of your pension fund to buy a annuity’ if you are overweight or smoke
or ten years’ worth of income, even if £30,000 pension fund to buy an
‘protected rights annuity’. Your pension regularly. Some companies offer higher
you die within this period. On your annuity. She hopes to live to a ripe
provider will tell you if protected rights rates to people who have followed
death, the income may continue to old age but, if not and having no
applies to you and what it means in certain occupations and to individuals
be paid for the rest of the guarantee closer relatives, she would like to
your circumstances. living in certain parts of the country –
period, or it may be paid to your leave something to her nephew.
shop around and compare the income
With a protected rights pension you: estate (and tax might be due on it).
She chooses a single-life level annuity you can get from different providers.
■ can take your protected rights If anyone is ﬁnancially dependent on you, with a ten-year guarantee.
pension at the same time as your do not look on a guarantee period as a More than one pension fund?
occupational or personal pension, substitute for a joint-life annuity. If you Harriet gets an income of £1,620 a
year. Whatever happens the annuity If you are using more than one pension
provided you are over 50 years old, choose a joint-life annuity, a guarantee
guarantees to pay out for 10 years fund to buy an annuity, think about
rising to 55 by 2010 (check that period may not be useful as you have
at £1,620 a year = £16,200. combining them when you are shopping
your pension scheme rules allow you already arranged for your annuity to
around – you may get a better annuity
to take your pension at age 50); continue to be paid on your death. After only two years, Harriet dies. The
rate from a larger fund. Advantages of
■ can convert up to one quarter of annuity has paid out a total income
combining your funds:
Annuity protection lump sum death of £3,240. The rest of the guaranteed
your protected rights fund into a
beneﬁt annuity payments continue to be paid ■ Many of the best-rate annuities have
tax-free lump sum;
to her estate and will be distributed a minimum fund size.
Another way of ensuring that if you
■ will have to buy a joint-life annuity according to her will.
die before the age of 75 your money ■ It’s often easier to budget with
paying a 50% spouse’s pension if
doesn’t die with you is an annuity just one payment a month.
you are married or have a civil
protection lump sum death beneﬁt. A Impaired life and enhanced annuities
partner; and Possible drawback:
lump sum equivalent to the pension fund
Some companies offer annuities that
■ can choose between taking a level you used to buy an annuity, minus the ■ You might not want to convert
pay you a higher-than-normal income
or escalating annuity. income you’ve already been paid, will all your pension funds at once.
if you have a health problem that
be paid to your estate or beneﬁciaries.
threatens to reduce your lifespan.
12 Shop around for the best annuity rates online at www.fsa.gov.uk/tables Shop around for the best annuity rates online at www.fsa.gov.uk/tables 13
How annuity rates vary – according to age, You may see an annuity rate expressed
as a percentage, or as so many pounds
Check annuity rates as you near
retirement and shop around for
sex and type of annuity of income for each £10,000 you have the best deal.
invested in your pension fund. For
example, an annuity rate of 6% is the
These ﬁgures show annuity rates at one point in time. They are only an illustration
same as £600 a year income for every
to help give you an idea of what you might get. Annuity rates change frequently for
£10,000 in your pension fund.
This chart gives an indication of the pre-tax monthly income from an annuity that
could be bought in 2006 for a pension fund of £25,000. The ﬁgures in the joint life
columns assume the person buying the annuity is a 65-year-old male who is ﬁve
years older than his female partner.
Joint lives Joint lives
Single life (no reduction on (reducing by 50% on Notes to the chart opposite
Types of death of scheme death of scheme
annuities member) member)
1. Level (no guarantee period): The 4. RPI linked (no guarantee period):
Male 60 Male 65 Female 60 Female 65 Male 65 Female 60 Male 65 Female 60 income provided is the same each year The income increases each year by the
£/mth £/mth £/mth £/mth £/mth £/mth
for the rest of your life. Retail Prices Index (RPI) but stops
immediately on death.
Level annuities 2. Level (guaranteed 5 years): The
Level income is the same each year for the 5. Joint lives: On the death of the
(no guarantee period) 122 139 114 126 106 119 rest of your life and is guaranteed to be scheme member, the income continues
paid for at least 5 years, regardless of (at the level you select when you take
(guaranteed 5 years) 121 138 113 125 106 118 when death occurs. out an annuity) to your spouse or
partner for the rest of their life.
3. Escalating 3% each year (no
Escalating guarantee period): The income 6. Better rates may be available for
increases each year by 3% but people with health problems, or who
(no guarantee period) 82 98 73 87 68 80 stops immediately on death. have followed certain occupations.
7. Source: FSA Comparative Tables
(no guarantee period) 78 94 68 82 64 65 website. April 2006. www.fsa.gov.uk/tables
14 Shop around for the best annuity rates online at www.fsa.gov.uk/tables Shop around for the best annuity rates online at www.fsa.gov.uk/tables 15
An alternative to buying an annuity
would be to draw an income directly
Retiring gradually from the fund. This is called ‘phased
income withdrawal’, and carries more
risks than buying a lifetime annuity
because the whole fund remains invested
and so the income it will provide is not
guaranteed. See page 27 for information
‘Phased retirement’ uses annuities to provide about income withdrawal.
a ﬂexible income. Another way of retiring gradually is to
buy a series of short-term annuities
You must convert enough segments lasting for 5 years at a time – see
Phased retirement is suitable only if
each time to buy an annuity. Insurance page 26.
you have a fairly large pension fund
companies often set a minimum fund
(after taking any lump sum), or have
size for annuity purchases.
other assets or income to live on.
Phased retirement can be a useful
ﬁnancial planning tool, for example,
You can arrange most personal
if you want to ease back gradually
pensions as a single plan, or as a cluster
on work and start to replace your
of many separate plans, sometimes
earnings with pension income.
called ‘segments’. You can use these
segments to buy a lifetime annuity at It also provides more ﬂexible help for
different times. This process is called your survivors if you die. Segments that
‘phased retirement’. you have not yet converted to annuities
can provide a pension for your surviving Phased
Each time you convert a segment to
dependants or a lump sum, depending
an annuity, you can ﬁrst take part of
on the terms of the pension plan.
the segment’s fund as tax-free cash. complicated and needs
Converting segments regularly – for By taking an income in this way you are
thought, planning and
example, once a year – means you can reducing your overall pension funds and
effectively use the tax-free cash, as well relying on investment growth to replace management. You’ll
as the annuity, to provide your income. part or all of what you have taken. probably need some
Alternatively, you can take all your specialist ﬁnancial
tax-free cash in one go and use the advice – see
remainder of the fund to provide
you with an income.
16 Shop around for the best annuity rates online at www.fsa.gov.uk/tables Shop around for the best annuity rates online at www.fsa.gov.uk/tables 17
Retiring later and ■ Private pension now The best rate he ﬁnds is:
postponing your annuity He has a pension fund of £60,000 and,
after taking a tax-free lump sum of
Single-life level annuity with a 5
year guarantee period at age 68 with
£15,000 (25%), he is interested in a a fund of £52,125 = £349 a month.
single-life, level annuity with a ﬁve-
You don’t have to buy an annuity with
your pension fund at retirement. You Example He checks the FSA’s Comparative
If other factors stay the same, Ted
Tables for annuities and ﬁnds that
may consider postponing buying an Ted is 65 years old and has a pension could be £75 a month better off by
if he buys an annuity now with the
annuity until a later date. Alternatively fund of £60,000. He plans to work postponing his annuity for three
remaining £45,000, the best rate is
you may decide not to buy an annuity part-time for the next three years £274 a month. years. But he will have given up
at all and draw an income directly from and will have a steady, but reduced income of £274 a month for three
your pension fund instead – see page 26. income. He checks on his options ■ Private pension in three
years, amounting to £9,864.
for deferring his pensions. years’ time
If you delay buying an annuity you
might expect a higher annuity rate It will take him over 12 years at his
■ State Pension now (including If he postpones taking an annuity for
because you’re older. But because three years, he reckons that his fund
higher annuity rate before he gets
Pension Credit) – £114
people are on average living longer, will grow over that period. As he intends back the income he gives up by
annuity rates are periodically adjusted ■ State Pension (including Pension to move his fund to relatively lower-risk postponing buying an annuity for
to reﬂect this. So it could be risky to Credit) in three years’ time: investments for the next three years, he three years.
assume that annuity rates will be higher According to the Pensions Service estimates that, after charges, his fund
On the other hand, he could:
if you postpone buying your annuity. leaﬂet, if he puts off claiming his will grow by 5% a year.
And of course rates may fall or rise for State Pension for three years, he ■ defer taking his State Pension for
a number of reasons. Ted’s estimated pension fund in
could, at current prices, get: three years’ time is £69,500,
three years, which would give him
You can also postpone taking your State assuming his pension fund grows by a lump sum; and
■ a lump sum of about £19,138
Pension, in exchange for a higher 5% a year after charges. He can take
(before tax) plus his weekly ■ buy an annuity now with the whole
pension or a taxable lump sum when pension; or a tax-free lump sum of £17,375, of his £60,000 private pension fund,
you decide to take it. (See Useful leaving £52,125 to buy an annuity.
■ extra State Pension of about which would give him an annuity of
contacts on page 31 for details of how
to get a leaﬂet from the Pension Service.) £34.75 a week (£150.58 a Ted uses the FSA’s Comparative Tables to £366 a month (£92 a month more
month) for life, when he starts check the annuity rate for his estimated than his original annuity).
claiming it. fund at age 68 (he can only use today’s
annuity rates as annuity rates in three
years’ time are not available).
18 Shop around for the best annuity rates online at www.fsa.gov.uk/tables Shop around for the best annuity rates online at www.fsa.gov.uk/tables 19
With-proﬁts annuities ■ the option of a guaranteed rate –
but the higher the guarantee, the
Investment-linked annuities These link your income directly to
the performance of the insurance
company’s with-proﬁts fund.
lower your starting income;
Remember, bonuses are not guaranteed,
but will depend on the ﬁnancial strength
Typically, your income is made up of the guarantor.
of two parts:
If you take this route with your pension ■ an option of an ‘assumed (or
The chance of a higher income in
fund, you will be linking your income ■ a minimum starting income anticipated) bonus rate’ (ABR). You
future – but only by taking extra risk.
in retirement to the ups and downs of choose the ABR at the outset from a
Investment annuities also have higher This is set at a low level, but, unless
the stockmarket instead of receiving a range set by the insurance company –
charges. investment conditions are very bad,
pre-determined income – see page 9. for example 0% (which assumes no
you’ll usually get at least this much
bonuses at all) to 5%. Once chosen,
Once your investment annuity is being income.
Investment-linked annuities offer the most insurance companies do not
paid you can only switch annuity
chance of a higher income than you can ■ bonuses allow you to change the ABR.
providers if you can ﬁnd a provider
get from basic annuities. With a basic
willing to take it on, though the costs The insurance company usually The insurance company announces
annuity the insurance company decides
involved might make it impractical. announces bonus rates once a year. new bonus rates every year. If the rate
where to invest your pension fund –
Bonuses can be both ‘reversionary’ equals your chosen ABR, your income
mostly in low-risk investments such as You cannot change the type of annuity
(paid for the duration of your annuity) does not change. If the declared bonus
ﬁxed-interest assets, gilts (loans to the if you do switch providers. If the risk of
and ‘special’ (paid for a year or so) is higher than the ABR, your income
government) and bonds (loans to an unpredictable and possibly falling
until the next bonus announcement. increases. But if the bonus is lower than
companies). You receive a pre- retirement income worries you, stick to
The amount of any bonuses depends the ABR, your income falls.
determined income from the insurance basic annuities.
on many factors, such as:
company for the rest of your life. If you choose a low ABR, your starting
You should get specialist ﬁnancial
■ how well investments are doing – for income is low. But you increase the
Investment-linked annuities offer you advice if you are considering an
example stockmarket performance; likelihood that future bonuses will
the opportunity to invest your pension investment annuity – see page 28.
exceed the ABR and that your income
fund in higher-risk investments, such as ■ business risk – the ﬁnancial strength
Investment-linked annuities can be either: will rise. You also reduce the risk that
funds investing in stocks and shares. of the fund; and
your income will fall. If you choose a
■ with proﬁts; or
Many experts believe that investment ■ the insurance company’s assessment higher ABR, your starting income will
annuities are unsuitable for people with ■ unit-linked. of what it can afford to pay out in be higher, but you run the risk that
pension funds below £100,000 – unless bonuses. your income could fall.
they have other assets. Investment-linked annuities are higher With-proﬁts annuities might offer:
risk than basic annuities.
■ a minimum, guaranteed bonus rate –
for example 3% a year;
20 Shop around for the best annuity rates online at www.fsa.gov.uk/tables Shop around for the best annuity rates online at www.fsa.gov.uk/tables 21
Unit-linked annuities Some unit-linked annuities work in a
similar way to with-proﬁts annuities.
Your income in retirement will be
linked directly to the funds you have
Your starting income is based on an
assumed growth rate (this works like Where to buy annuities
invested in. You can usually choose the assumed bonus rate – see page 21).
the types of fund, for example: If the fund grows at that assumed rate,
your income stays the same. If growth is
■ medium-risk managed fund where
a fund manager selects a broad
less than the assumed rate, your income
falls. A few unit-linked annuities let you
Insurance companies sell annuities – the rates
range of different shares and other
investments – spreading your money
invest in a ‘protected fund’ which limits vary from company to company so shop around
the fall in your income.
widely reduces risk; for the best deal.
Most unit-linked annuities do not
■ higher-risk fund where a fund
guarantee a minimum income. Even if As with most things, shopping around the best annuity rate for you if you
manager selects shares and other
your income is based on an assumed can get you a better deal. Although you wish, or your scheme trustees can do
investments in a particular country
growth rate of 0%, your income could can usually buy an annuity from the this for you.
or sector, such as smaller companies.
still fall if the value of the underlying same company with which you built up
Because your money is less widely Before shopping around, make sure you
investments falls. your pension fund, do not assume it
spread the risk is higher; understand what your existing provider
will automatically offer you the best
You should not consider a unit-linked is offering you.
■ tracker fund (usually medium rate. You may do better by shopping
annuity unless you can cope with an
risk) which closely follows the around and checking if another Check:
income that may swing widely and may
performance of a particular company could offer you more.
fall. You would need a large pension ■ Does the company holding your
fund or other sources of income (or In most cases, you can use your pension pension fund offer you a ‘guaranteed
Usually, these have lower charges both) to fall back on. fund to buy an annuity from another annuity rate’? This is not the same
than managed funds. company. This is called using your as a guaranteed period. In the past,
The more risky the underlying fund ‘open market option’. some insurance companies sold
you choose, the more your retirement pensions with a ‘guaranteed annuity
Your insurance company must tell you
income may vary – both up and down. rate’. Now that annuity rates are a
about this and explain the advantages
lot lower, these guarantees can be
and disadvantages. Make sure you ask
for all the information you need to
shop around for the best deal. ■ Will your existing pension company
impose a charge against your fund if
If you are a member of an occupational
you buy your annuity from another
money purchase pension scheme, you
can shop around on the open market
and ﬁnd the insurance company with
22 Shop around for the best annuity rates online at www.fsa.gov.uk/tables Shop around for the best annuity rates online at www.fsa.gov.uk/tables 23
■ Get a quote from your pension Seven steps to shopping around 5. Does your fund need to be a certain
provider for the type of annuity for your annuity size to qualify for the better rates
you want. offered by another company? You
It’s usually a good idea to allow around
may ﬁnd it difficult to shop around
six weeks before you want to buy your
There can be a big difference between if you have a small pension fund
annuity to get quotes.
the best and the worst annuity rates. (say less than £10,000). Some ﬁrms
1. Get an estimate of the value of your may not be interested in advising on
You could be better off in retirement by pension fund, taking account of any small sums.
shopping around for the best annuity. charges, from your pension provider.
6. Are you a smoker? Some annuity
2. Decide how much tax-free lump sum providers offer higher rates for
Shopping around for an annuity
you want to take (usually up to a smokers.
Some companies are keen to attract quarter of your fund) and deduct it
7. Do you have a medical condition that
annuity customers, so they offer from the pension fund value your
could reduce your life expectancy?
competitive rates; others are less keen. pension provider gives you.
Some providers of impaired life
The rate you get can affect your income
3. Decide on whether you want: annuities are interested in pension
by hundreds of pounds a year. When
funds smaller than £5,000.
comparing different quotes, make sure ■ a single or joint-life annuity; if
you base your request on identical joint life, whether the pension You should now have the facts you need
types of annuity. to your partner is paid in full to get quotes from a range of providers.
or reduced (say by one-third); Remember that annuity quotes are
Annuity rates can be compared by
usually only ﬁxed for between 7 and 28
visiting the FSA’s Comparative Tables ■ a level or escalating annuity; if
days from the date they are issued.
at www.fsa.gov.uk/tables escalating – then by the RPI or
a ﬁxed rate.
Alternatively, get specialist ﬁnancial
advice – see page 28. 4. Think about whether you want
payment of your annuity to continue
for a speciﬁc number of years (5 or
10), should you die shortly after
24 Shop around for the best annuity rates online at www.fsa.gov.uk/tables Shop around for the best annuity rates online at www.fsa.gov.uk/tables 25
However, the Government has single-life annuity for person of your age
indicated that alternatively secured and sex. There is no minimum amount.
Other retirement options pensions are only intended for a small
group of people who have a principled
For more detailed information, see the
FSA Factsheet Income withdrawal – a
religious objection to buying an
retirement option for you?
annuity. You should take this into
account when making a decision on
Phased retirement and income
how to secure your pension. Also,
Alternatives to buying a lifetime annuity. inheritance tax may apply to any
withdrawal can be combined.
left-over funds on your death. This means you would start to draw an
Unsecured pension using short-term
All these options involve extra costs income from just part of your pension
and extra investment risk compared Unsecured pension using income fund on one date, leaving the rest of the
with buying a lifetime annuity With a short-term annuity, you can use withdrawal fund intact. To increase your income at
straight away. They are not usually part (or all) of your pension fund to a later date, you could either increase
buy a ﬁxed-term annuity lasting up to You can take a taxable income direct
suitable if you have a small pension the rate of withdrawal (provided you
ﬁve years. You can choose your annuity from your pension fund – this is called
fund (after taking any lump sum) did not exceed the maximum limit) or
options in much the same way as basic ‘income withdrawal’ or ‘income
or you have no other assets and start to draw an income from a further
annuities (see page 8). In the meantime, drawdown’ or ‘pension fund
sources of income to fall back on. slice of your pension fund.
the remainder of your fund continues withdrawal’.
to be invested. If you use one of the above unsecured
Income withdrawal is an option with
pension options and reach age 75 you
If, for whatever reason, you decide At the end of the term of the annuity most personal pensions and some
will have to make a decision about
that you’re not ready to buy a lifetime you can buy another short-term occupational money purchase schemes.
how to secure an income from your
annuity, you will have the following annuity. You can also combine income In some cases if you are in an
options: from a short-term annuity with employer’s scheme and want to use
income withdrawal. You can continue income withdrawal, you must ﬁrst
■ an unsecured pension using short-
in this way until you are ready to buy transfer your pension rights from the
term annuities or income
a lifetime annuity or until you reach employer’s scheme to a personal
age 75. pension. There will probably be charges
■ an alternatively secured pension. for making this transfer.
An unsecured pension will stop at age
An unsecured pension means that after 75. By that time, you must secure an The income you take from the fund must
taking tax-free cash, the remainder of income from your pension funds, which be reviewed every ﬁve years to make
your pension fund remains invested. generally means buying a lifetime sure it is in line with HM Revenue &
annuity. A variant to this is an Customs limits. You can draw an income
alternatively secured pension, which from your fund up to a maximum
works in a similar way to an unsecured income that is equivalent to 120% of
pension but has slightly different rules. the income you would get from a level
26 Shop around for the best annuity rates online at www.fsa.gov.uk/tables Shop around for the best annuity rates online at www.fsa.gov.uk/tables 27