Alexander Grace Chartered Financial Planner

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Assessing annuities: are they a sound investment choice? 

What is an annuity?  

An annuity provides a guaranteed income for life in exchange for a lump sum payment. It converts the money you’ve built up in your pension pot into a regular income in retirement.  

The amount your annuity will regularly pay out depends on how much you pay in, annuity rates at the time of purchase and which type of annuity you choose to buy.  

While you can take the first 25% of your pension pot tax-free, you’ll get charged income tax on any additional money you take. 

They’re a popular alternative to workplace and person pensions thanks to the predictability, security and simplicity they offer. However, their total returns depend on your life expectancy, so you may get back less than you put in. They’re also inflexible and can’t be changed or cashed in once purchased, so you won’t have the option of varying it should your circumstances change. 

Let’s take a look at some of the types of annuities, and help weigh up whether an annuity makes financial sense for you.  

Types of annuities  

  • Lifetime annuities – will pay you an income for the rest of your life. 
  • Level annuities – will pay you the same income each year. They have a higher starting income than an escalating annuity, but they can leave you vulnerable to inflation. 
  • Escalating annuities – will rise each year at a fixed rate. It may start at a lower income than a level annuity, but will rise a set amount annually.  
  • Inflation-linked annuities – will rise each year in line with the retail price index. This protects your annuity against inflation, but will start at a much lower rate.  
  • Impaired or enhanced annuities – will pay out a higher income if your health or lifestyle may shorten your lifespan.  
  • Short-term or fixed-term annuities – use part of your pension pot to provide a short-term income. You might choose this option if you don’t want to commit your pension fund to a life annuity as you believe rates might get better in the future. 
  • Joint life annuities – will pay an income to your spouse or partner after your death, but usually at a lower rate. 
  • Investment-linked annuities – part of your income is guaranteed, the remaining part linked to investment performance. 

Key considerations  

If you think an annuity could be right for you, speak to your adviser to make sure you’re getting the best possible deal. Shopping around can really pay off – annuity broker Just Group found that as of August 2023, the gap between the best and worst-paying annuity available to a healthy 75-year-old who spent £50,000 was £650 of income each year.  

We can also help you to explore other options for your pension pot. In some cases, combining annuities with drawdown could create a retirement income plan that provides you with security and flexibility.  

We’ll carry out a review and explain how much you’re likely to receive from your pension. Together, we’ll look at your options, so you can decide whether buying an annuity will be the right decision for you and your retirement. 


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