Finance Matters: What is an annuity?

July 21, 2014

What is an annuity? In its most simple terms, a pension annuity is a contract with an insurance company to pay you an income for the remainder of your life in return for your pension fund. Annuities have attractions.

They are a promise to pay out a given sum of money (sometimes inflation-linked) until the day you die and can provide dependants benefits.

So why might you hear people saying they are bad? Well, except for the potential of a dependant’s pension, they provide no lump sum death benefits. They are inflexible, and many feel they provide poor value because it can take many years to recoup your initial purchase amount.  If you do choose an annuity, please shop around.  It’s unlikely that your existing pension provider is offering you the best income.

Is there an alternative to an annuity?

The main alternative is known as income drawdown.  Income drawdown involves leaving a fund invested and drawing a flexible income from this pot.  However, the investments need to grow fast enough to keep pace with your withdrawals and any charges so that you are no worse off than if you had bought an annuity. So, for investors willing to take a balanced or higher investment risk it can be a useful option, especially if they have other investments or income sources.

Recent announcements in the 2014 Budget mean there are now even more options for pensioners so make sure you get some proper advice to help you decide on your best option.

 

This article is for general use only and is not intended to address your particular requirements. It should not be relied upon in its entirety and shall not be deemed to be or constitute advice.

GreenSky Wealth Ltd is an appointed representative of Financial Limited which is authorised and regulated by the Financial Conduct Authority. FCA No: 516410