From speaking to our clients about their retirement plans, an annuity forms part of the discussions to determine a suitable solution; but what is an annuity?
An annuity is a retirement product which you purchase from a provider using some or all of your pension savings in exchange for a guaranteed income for the rest of your life (however long that may be). Additionally, you could opt for a Fixed-term annuity, which pays the income for a defined set period i.e. 5 or 10 years. After which, consideration will need to be made as to how your income will be sourced.
If we look at an example to help explain; based on a 60-year-old (date of birth 01/01/1960), in good health with a pension pot of £100,000 – what annuity could they purchase?
- On a single-life basis, payable monthly in arrears, level in payment, with a guaranteed period of 5 years – the income provided would be £4,106 per annum*
- On a joint-life basis 50% dependants’ benefit should they pre-decease their partner, payable monthly in arrears, level in payment, with a guaranteed period of 5 years – the income provided would be £3,875 per annum*
* annuity figures sourced from IRESS Exchange as of 5th August 2020, based on a 60-year-old. The joint-life quotes included a dependant with the same age.
So, what do the different basis above mean?
If we consider the process of buying a car… We have the standard model, but when we want to add heated seats, tinted windows, the sports package etc. the car becomes more expensive with each item added to it. This works in a similar vein when considering an annuity. The annuity can be based on several basis, some of which are detailed below:
- Single or joint life – If a spouse is included, should the annuitant pre-decease their spouse then the income payment will continue for the remainder of the spouses lifetime at the defined percentage (in the example above, 50% of the annuitants annuity income).
- Guarantee periods – we have included a 5-year guarantee period which means the annuitants income will be guaranteed to be paid for that period, essentially insuring against early death.
- Escalation or level payments – in the above example the payments are level i.e. they will stay the same for the remainder of life. However, you could request that the payments increase in line with inflation or at a set percentage.
Should an annuity be appropriate, it is important to understand the client’s circumstances and ultimately setting the correct basis for the annuity.
Can my health affect the annuity income?
It is also very important to disclose medical information when considering an annuity purchase as this is likely to provide you with a better annuity rate. Simply put, the providers underwriters will assess your health to determine the annuity rate the are able to provide and should your life expectancy be affected by your health, then it is likely the annuity provider will be able to offer you a better rate.
Many confuse disclosing medical information to being assessed for life cover – when applying for life cover, you want to be in the best possible health to ensure that the monthly premiums are not impaired. The opposite is true when considering an annuity – if you have any medical impairment, however severe, disclose it as it may benefit you!
Summary
An annuity forms part of the wider retirement planning review process and whilst drawdown may be a preference for many, an annuity should not be overlooked. An annuity could form a part of the overall solution using a portion of your pension savings to provide you with a secure income stream. This cocktail approach of using two products may give you a best of both world approach.
At Wingate Financial Planning we strongly believe in financial planning for the long term and are here to assist in making informed, financial decisions with you. Please feel free to get in touch if you wish to find out more.
