Types of Annuity
There are a number of options you will want to consider when making your mind up about the right type of annuity for you. You should seek advice from an independent financial advisor who can assess your personal circumstances and advise on the best option for you.
An enhanced or impaired annuity takes account of your health and lifestyle to determine the level of income you could receive. You could qualify for an enhanced annuity if you:
- Are in poor health
- Are overweight
- Live in certain postcodes
A shorter life expectancy may mean that you could receive up to 40% more income as your annuity provider will work on the basis that they will have to pay you income for a shorter period of time.
By choosing an investment-linked annuity you will be taking on a level of risk as your annuity income could go down as well as up. Investment-linked annuities invest in stocks and shares and the income you receive will be dependent on the performance of the fund. Therefore you will not receive the guaranteed level of income that you would with conventional annuities although your annuity provider may guarantee a minimum level of income no matter how the fund performs.
Investment-linked annuities are usually considered by those with a large pension fund as they can afford to take more risks on the stock markets.
Fixed Term Annuity
Fixed term annuities provide a guaranteed level of income for a fixed period. At the end of the term a Guaranteed Maturity Amount (GMA) is provided to you which is agreed at the outset. This allows you the flexibility to re-evaluate your options at the end of the term rather than be tied to the original deal for the rest of your life as with a conventional annuity. For instance, at the end of the term you could purchase a further fixed term annuity or switch to a lifetime annuity or completely re-evaluate your retirement plans.
Purchased Life Annuity
Purchased life annuities (PLA) can be purchased with money from any source. This distinguishes them from conventional annuities which are purchased only using your pension pot. Therefore you could use a lump sum from an inheritance, proceeds of a property sale or even money from savings to purchase PLAs.
Just like conventional annuities, they provide a guaranteed income for life. However, they have a tax advantage over conventional annuities as the Inland Revenue regard PLAs as the return of your own capital so you will only be taxed on the interest element of your PLA payments. The pension fund that derives conventional annuities has already had generous tax relief over many years and will be taxed at your marginal rate. Therefore you will receive greater income from PLAs.