Home > Finance and Pensions > Buying an Annuity

Buying an Annuity

By: Jeff Durham - Updated: 15 Apr 2010 | comments*Discuss
 
Annuities Buying An Annuity Annuity

Annuities are a way of turning your retirement savings into a regular income. You pay a lump sum to an insurance company and the insurance company will make regular payments to you in return, usually monthly. These payments are a fixed amount and will continue for a set number of years, or until you die, depending on the type of annuity.

The value of the annuity will depend on several factors including:

  • Your age
  • Current interest rates
  • The value of your pension fund
  • The type of annuity you choose
  • The insurance company from whom you purchase the annuity
  • The guaranteed period you choose

Advantages

The main advantage is that an annuity provides a steady, regular income, making budgeting easier during your retirement. It also removes the need for you to invest and manage your retirement savings which can become difficult if your physical or mental health deteriorates later in life. The income level will not fall with the exception of profit and unit linked annuities.

It is a straightforward procedure to buy an annuity with minimum paperwork and no ongoing reviews. Once established, there are no additional charges and nothing further for you to do and, if you wish, you can receive all your tax free cash lump sum at the start.

If you buy an annuity that lasts until you die, you also get the security of knowing that your money won't run out. The insurance company will keep paying even if you live for longer than anticipated. However, the size of the regular payout may not eb as large if you buy a lifetime annuity, as opposed to one which lasts for a fixed amount of years.

Disadvantages

It is important to note that depending on the type of annuity you buy, the regular payments may stop when you die. If you die early in retirement, the insurance company may get to keep a substantial amount of your money. Some insurance companies try to reduce this risk by offering a guaranteed payout period. That means if you die early the annuity will continue to be paid to your estate. However, you do pay a 'price' for this by getting a lower amount for each year whilst you are still alive. Whether you think that 'price' worth paying depends on how you regard your financial obligation to any dependants or to the people you have chosen to leave your money to after you die.

Your circumstances may also change in retirement and it's important to remember that annuities aren't flexible. Once you have purchased it, you cannot alter it any way, e.g. adding a spouse's pension.

The annuity could also provide poor value for money if rates are low when you retire which could erode the value of the fixed payout. You also no longer have a large chunk of money for big purchases so if you spend all of your retirement savings on an annuity, you will decrease your flexibility to cope with unexpected expenses.

There are many different types of annuities you could consider including conventional annuities, with profits and unit linked annuities, impaired life annuities and market segmentation annuities.

Annuity rates are based on long term gilt rates and therefore influenced by interest rates. With interest rates at their current level, annuity rates are currently at their lowest ever level and generally will only ever increase if it is anticipated that long term interest rates will also increase.

Before you buy an annuity you should check it out carefully. Talk to other retirees about their experiences and seek advice from an Independent Financial Advisor.

You might also like...
Share Your Story, Join the Discussion or Seek Advice..
Why not be the first to leave a comment for discussion, ask for advice or share your story...

If you'd like to ask a question one of our experts (workload permitting) or a helpful reader hopefully can help you... We also love comments and interesting stories

Title:
(never shown)
Firstname:
(never shown)
Surname:
(never shown)
Email:
(never shown)
Nickname:
(shown)
Comment:
Validate:
Enter word:
Topics
Latest Comments
  • Col
    Re: Clubs to Join in Retirement
    Hi. I,m Colin just lost my wife of 53 years I live in Warwickshire is there any groups in my area as I need people for friendship…
    22 November 2020
  • None
    Re: Sex Beyond 75
    I live in paisley i love to meet nice lady locally mat
    14 November 2020
  • Judith
    Re: Clubs to Join in Retirement
    Are there any activities or groups currently taking place in Wakefield for over 60’s. I am a social person missing human company.
    7 October 2020
  • Brenda
    Re: Clubs to Join in Retirement
    Very young 75 year old looking for friends for days out and meals etc. In my area. I am a twin she is also on her own. Young at…
    7 October 2020
  • Fancy
    Re: Clubs to Join in Retirement
    Widowed over 2 half years but nice to socialise again
    29 September 2020
  • Wendy
    Re: Clubs to Join in Retirement
    I'm 63 and still working but love walking, swimming & days out. I drive & am happy to travel. I'd love to have a friend to walk or…
    23 September 2020
  • hillmill
    Re: Clubs to Join in Retirement
    Hi, I recently lost my husband and I am looking for companions that would like to meet up and maybe do day trips and coffee meet…
    21 September 2020
  • Jeanne
    Re: Clubs to Join in Retirement
    I have recently moved to Long Buckby Northamptonshire living with my Son and family, I would love to have female friend to chat to…
    16 September 2020
  • Shylady
    Re: Clubs to Join in Retirement
    I am a young 71 year old and lost my husband last year am looking for someone who has the same interests and would enjoy my…
    14 September 2020
  • Dolly
    Re: Clubs to Join in Retirement
    I am a 68 year old lady I have just lost my beloved husband due to the virus he was 71 and in good health so it was very sudden I…
    13 September 2020