The rates you receive from pension annuities are based in part on index-linked gilts that provide an index-linked income and redemption values in the future for the providers. In the long term annuity rates are likely to continue to fall due to lower inflation and improved life expectancy. Inflation also has an effect on the value of money and this will erode the buying power of pension annuities over time.

With an open market option it is possible to counteract the effects of inflation by adding an escalation feature that increases the pension income over time. However, this would mean a lower starting income when compared to a standard (conventional) annuity. There are many other features that can be changed on an annuity such as adding a spouse’s income or a guaranteed period of payment in the event of an early death of the annuitant. All these extra benefits have a cost that reduce the annuity income from the start. It is best if you seek pensions advice from an independent financial adviser before making any decisions.

At retirement the individual can use a money purchase fund, personal or company, to buy an annuity using an open market option to search for the highest pension annuity. Features can be added at this point such as escalation, a spouses’s pension or frequency of payment. Once you have purchased an annuity it cannot be changed, so learn more about annuities, compare annuity rates and before making a decision at retirement, secure a personalised pension annuities quote for an accurate income for you and offering guaranteed rates.

Two thirds of people in the UK are retiring today only to accept a poor annuity income from their pension provider, when an open market option could have increased this income by up to 30%, worth thousands of pounds every year for the rest of their lives, simply by asking for the best annuity rates.

It is very important to purchase the right pension income because once bought pension annuities cannot be switched to another annuity provider, cannot be changed to a different type of annuity and cannot be altered in any way for the rest of the annuitant’s life. Therefore if the annuitant could benefit from an enhanced annuity or impaired annuity, this option must be explored before buying the annuity.

Added features
The annuitant can add extra features to a pension annuity depending on their requirements.  For example you could add in a spousal benefit ie if you die a proportion of your annuity will automatically paid to the surviving spouse or a guaranteed period or benefits increasing with inflation.  These should be considered specifically to your own needs, your financial planner will be able to help you with this.

Annuity charges
By purchasing an annuity through an open market option, the current pension fund provider may make an administrative charge. However, the extra income secured far outweighs such costs. The other consideration is what costs are there from the new provider of the pension annuity.

To a certain extent this is not a consideration because when an annuity is purchased for the highest possible income, the capital now belongs to the insurance company. In general, the insurance company take 4% from the capital and this represents a charge for administration and to cover the distribution costs.

The distribution cost include such things as advertising typically this cost is between 1.0% and 1.5% of the purchase price of the annuity.

Annuity protection
There is always the concern that the insurance company which provides the annuitant with a pension income could become insolvent at some point in the future and what would happen to the payments. It is therefore very important that some research is conducted regarding the financial strength of the provider and this can be offered by your financial planner.

However, there is protection provided in legislation, and in particular the original protection for a policyholder was introduced in the Policyholder Protection Act 1975 (PPA 75) where the policyholder protection board (PPB) acts as an industry funded safety net when a UK insurance company becomes insolvent.

Under the Policyholder Protection Act 1997 (PPA 97) this protection covers a purchased life annuity and pension annuity. In the first instance the PPB must initially seek to transfer the ongoing policies of the insolvent insurer to another company. The PPB must ensure the policyholder will receive 90% of the future benefits form the annuity. The provision of the PPA 1997 has been incorporated in the FSA, applying from midnight on 30 November 2001.

Any further questions relating to annuities?

If you require any further information regarding annuities from an experienced, fee-based financial planner, please call us on: 01582 839280 or email us.