10 things to know about annuities

10 things to know about annuities

Frequently Asked Questions

1. Surely annuities are poor value for money in today‘s climate.

This is not true.  Taking into account prevailing interest rates and inflation, annuities are still good value for money.

2. Surely my pension provider will purchase the annuity for me?

Yes they will, but is your pension provider offering the best level of income available?  More often than not they are not going to recommend you purchase your annuity with one of their competitors.

3. Don‘t I have to purchase an annuity from my pension provider?

No you don‘t.  In most cases you will have an ‘Open Market Option‘ allowing you to shop around to obtain the best annuity rates for your chosen circumstances.

4. Surely all annuities pay the same level of income?

No.  The difference between the best and worst annuity income can often be in excess of 10% per annum.  If you were to live for 25 years in retirement this could be costly.

5. If I shop around, surely I could obtain a more flexible contract providing the same level of income?

Unfortunately not, as flexibility comes at a cost.  To add a spouse, guaranteed period or to have the income escalating on an annual basis, will always reduce the starting income on the annuity.

6. If I buy an annuity, will the insurance company pocket the fund upon my death?

It is true that if no spouse benefit or guarantee applies on the annuity then upon death the fund does revert to the insurer.  It must be said, however, that it is because of this issue that annuity companies are able to sustain the levels of income, no matter how long you live. This is known as ‘Cross Mortality Subsidy‘.  If you retired at 60 and lived to be 100 you would benefit from the subsidy as your income is guaranteed for life.

7. Isn‘t the income I receive from my pension annuity tax-free?

No.  All income paid from pension annuity contracts are taxed in accordance with your prevailing tax code.

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