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What Are The Main Advantages of an Annuity?
You can use your pension pot to buy an annuity. An annuity is an insurance policy which gives you a guaranteed income for the rest of your life.
The main advantages of a pension annuity are: –
- You don’t take any investment risk. Your income is guaranteed for life.
- You can still take up to 25% of your pension pot as a tax-free cash lump sum then use other 75% to buy an annuity.
- Even if the insurance company you buy an annuity from goes bust the Financial Services Compensation Scheme will cover you in full.
Are There Any Disadvantages If I Buy an Annuity?
The main disadvantages of a pension annuity are: –
- You’ll pay income tax on your annuity income.
- There’s no flexibility. Once you’ve bought your annuity it can’t be changed, even if your circumstances change e.g. you don’t need the annuity income, you need more income to live on.
- Once you’ve bought an annuity you only have a short period to change your mind (usually 30 days). After this you’re locked in.
How Much Income Can I Get From an Annuity?
Finding the best annuity rate for you depends on a number of factors such as: –
- How much you have in your pension pot.
- Your age.
- Whether you want your income to increase every year.
- Whether you want the annuity to continue to pay out after you die.
- Your health and lifestyle.
There are lots of different types of annuity. We are independent advisers and can shop around the whole market to find the best annuity and the best annuity rate for you. Remember, you don’t have to buy an annuity from your current pension provider.
|Annuity Type||How It Works|
|Single life||Paid to you for life.|
|Joint life||Payments carry on to your spouse or partner after you die.|
|Impaired Life||If you smoke or have a medical condition, e.g. diabetes or high blood pressure, an insurance company may be prepared to pay you more than they would if you are healthy.|
|Investment linked||Your payment can vary and depends on the success of the investments it’s linked to.|
Whilst some are more expensive than others, your annuity rate per £1,000 of pension pot will reduce as you add these options.
|Annuity Option||How It Works|
|Guaranteed Period||Pays out for a set term equal to the guaranteed period even if you die within that term. E.g. you get a 10-year guarantee but die after 5 years. In this case your spouse or partner still gets the payments for another 5 years.|
|Escalating||The amount you get increases each year to lessen the effect of inflation on your payments.|
|Level||Your payment remains the same throughout life.|
|Capital Protected||Your purchase price less payment made is paid to your spouse or partner if you die within a set period.|