A conventional annuity, also known as a lifetime annuity, pays a known and guaranteed income for the rest of your life. This income is paid by your chosen insurance company in exchange for the capital that you have built up in your pension fund.
The level of income you receive is based on the size of your pension fund, your age, gender and the options that you choose at the outset.
You may be entitled to an enhanced annuity if you have certain medical conditions or have a particular lifestyle (i.e. you smoke).
An enhanced, or impaired, annuity is a type of conventional annuity, where your health and lifestyle could entitle you to a higher income.
As with a conventional annuity, an enhanced annuity pays a known and guaranteed income for the rest of your life. This income is paid by your chosen insurance company in exchange for the capital that you have built up in your pension fund.
The level of income you receive is based on the size of your pension fund, your age, gender, the options that you choose at the outset, your health and your lifestyle. Individuals who take prescribed medication, have or have had known medical conditions could qualify for a higher annuity rate due to what many insurance companies perceive as a shortened life expectancy.
Some relevant health conditions include, but are not limited to:
You could also quality for an enhanced annuity due to certain lifestyle factors i.e. if you are a smoker or are severely overweight. Having worked in certain occupations or living in certain areas of the country could also qualify you for a higher annuity rate.
Fixed term annuities provide a guaranteed level of income, for a specified time period e.g. five years.
At the end of the specified term you receive a guaranteed maturity sum. This amount is known and fixed at the outset. It cannot go up or down and is not dependent on stock market performance.
You can use your guaranteed maturity sum to reinvest in another pension product or purchase an annuity at that time.
You can choose the level of income that you wish to receive, within Government limits, although the higher the income you select, the lower your guaranteed maturity sum will be.
Fixed term annuities may be a useful option if you anticipate your personal circumstances or income needs may change later on in retirement. If your health deteriorates you may even qualify for an enhanced or impaired annuity at the end of the term.
Investment linked annuities, also known as with profits annuities, differ from conventional annuities in that your pension fund is put into investments, such as stocks and shares, to provide the opportunity for potential growth. There are two types of investment linked annuities:
Please note: we only provide quotations on with profits annuities. If you are interested in unit linked annuities, we recommend that you contact an Independent Financial Adviser.
With profits annuities
The amount of income you receive each year depends on the performance of the provider's with profits fund for each 12 month period and are then adjusted each policy anniversary to take into account the actual declared bonuses. This means that the annuity amount can go up or down depending of the performance of the fund.
Investment Linked annuities, tend to have higher charges than conventional or enhanced annuities. Any charges, including administration and investment costs, are taken into account when setting the annuity rate and before calculating your starting income. Details of these charges are shown on your full quotation.
Legal & General With Profits Annuity
We will provide you with quotations based on an Anticipated Bonus Rate or 'ABR' of 0%, 3% and the maximum of 5%. This means that you are anticipating bonuses that will be allocated over the following year at a rate of 0%, 3% or 5% and these incomes are guaranteed for the first year.
If the actual bonus declared is less than anticipated, your income for the following year will reduce. If the fund performs well and the actual bonus exceeds the ABR, your income, the following year, will increase.
It is standard practice that in the good years, some of the investment returns are held back and are used to boost bonus rates in the years when investment returns have not been so good. Therefore, 'Smoothing' any potential fluctuations in your income.
Any Protected Rights funds cannot be included and will be quoted as a conventional annuity.
Guaranteed Minimum Level
The guaranteed minimum level of income is calculated as a percentage of the starting annuity. Your annuity will never fall below this.
0% ABR 2.1 - 3.0% ABR 4.1 - 5.0% ABR
= 100% of starting income = 50% of starting income = 30% of starting income
Prudential Income Choice Annuity
The quotation we have given you is based on the maximum income allowable and is based on a Required Smoothed Rate or 'RSR' of 6%. This means that the declared bonuses for the following year need to be at a level of at least 6% to maintain your level of income.
If the actual bonus is less than 6%, your income for the following year will reduce. If the fund performs well and the actual bonus exceeds 6%, plus charges, your income for the following year will increase.
You can choose the amount of income from the specified range and the RSR changes to reflect this income. You can change your income from a specified range at any policy anniversary, but you are only allowed one change every 2 years. Any Protected Rights are quoted on the minimum RSR of 1%, the 'secure level'. This can be increased after the 2nd policy anniversary.
The 'Secure Level' is your guaranteed income amount. At the start of your annuity, the 'Secure Level' is the minimum income available (see quote). It then goes up by half of any increases in income. If there are no increases, or income reduces, the Secure Level stays the same. e.g. annuity goes up by £50, secure level goes up by £25.
This option was called an unsecured pension or alternatively secured pension, but it is now part of Drawdown Pension (which also now includes a short term annuity).
Income Drawdown allows a saver to take income from his or her pension fund while the fund remains invested and continues to benefit from any fund growth. It is a widely held belief that a pensioner generally needs a substantial fund value to take income drawdown.
Many pension providers specify minimum Pension savings values for Income Drawdown, but Independent Financial Advisors specialising in pensions normally consider it for all clients as they approach pension age.
Income Drawdown can be used in conjunction with annuity purchases.