Prime Time Financial

The majority of retirees take their income via an annuity. However, that doesn’t necessarily mean it is always the best approach, and since it is such a big decision it is worth looking into in rather more detail.

So what is a Lifetime Annuity?

A lifetime annuity converts your pension fund into pension income. How much income you receive for a given level of pension fund depends on the options chosen and the annuity rate you get. (See Latest Rates - Annuity Rates for some idea on this, but you need to understand the options before choosing.)

They are only relevant to a “Defined Contribution” (or “Money Purchase”) pension plan where a sum of money is built up over time, and are not relevant to a “Defined Benefit” scheme (such as a final salary scheme or public sector pension), where your pension income is paid out of the pension scheme.

As a starting point, here are some advantages and disadvantages of lifetime annuities:

Advantages 

• You receive a guaranteed income for life
• You may have an option to guarantee an income for a spouse / civil partner
• Income could be set up to increase with inflation
• Additional income may be available if lifestyle or health issues indicate that you may have a shorter life expectancy than average
• The annuity could be investment-linked which provides some potential for investment growth

Disadvantages

• Decisions are taken at outset and cannot be changed later
• The income is fixed

If you die soon after starting an annuity your estate would lose that capital (although you could choose an option to have the income continue until the end of 5 or 10 years).

The guaranteed / fixed aspect of annuities is the big factor – they are like two sides of the same coin - it’s both an advantage and a disadvantage, so one approach might be to take some of your income from an annuity – giving you a basic income which would last for life - while other income options are used to give you some flexibility. Whether that is realistic would depend on the size of the pension fund which you have available; if you have only built up £10,000 or £20,000 then it would not be realistic to split it.

We mentioned some different options in looking at advantages and disadvantages. You can read more about those in What Types of Annuity Are There?.

Otherwise, see How we can Help - Retirement Planning or Contact Us for more information.

Last reviewed 29th October 2010