Before you dive right in and sign up for an annuity, it’s important that you learn about the different types of annuity options available.
When you sign up for an annuity, you must ensure you purchase the right type, one that offers the best options for you and your family.
Once you’ve committed to an annuity it’s almost impossible to make any changes. Because of this, it’s important that you’re well-informed beforehand regarding annual income options, annuity taxation since you’re essentially making an irreversible decision.
There are several annuity options available, each of which will provide different income levels for you and your family. The amount of annual income that’s offered by a specific type of annuity often differs from provider to provider. If you’re not certain whether a specific annuity type is the right choice for you, you may want to meet with a financial advisor.
Often, financial advisors will recommend an ISA in addition to a lifetime annuity, both of which will protect both you and your family.
To learn more about annuity and ISA options, click here to read our extensive ISA guide.
This is a type of lifetime annuity that some providers offer. Enhanced annuities can offer a higher rate, which equals a higher income, compared to a standard lifetime annuity, but only if you meet certain criteria which could potentially shorten your life expectancy, such as:
- A history of smoking
- A history of alcohol abuse
- If you spent a significant portion of your life working in a hazardous environment.
The annuity provider may ask several questions before you’re given an enhanced annuity rate. The rate that’s offered will be based on average life expectancy if you’ve met one or more of the criteria above.
The lifetime annuity option is considered the most common type of annuity. This type of annuity will provide a steady income stream for the rest of your life, or for the rest of the lives of the people you have designated to receive funds after your death.
The rate of the annuity involves the amount of money that you’ll be offered for each pound in your pension fund. The rate will be based on investment returns for low-risk investments that the annuity provider will invest your money in, and on the average life expectancy for people your age.
Some annuities, such as an impaired life annuity, is specifically designed for people that suffer from certain medical conditions that can essentially shorten their life expectancy. In order to qualify for this type of annuity, you must give the provider permission to view your medical history and fill out a medical questionnaire. The provider may request that you have a more current medical exam performed and may even request to speak directly to your doctor. The rate that’s offered will be based on your life expectancy estimation, which is determined based on the medical information supplied by both you and your physician.
The temporary annuity will only pay out until you die or for a fixed term. For a temporary annuity, the max term is around five years. This type of annuity can be useful if you’re desperately in need of more income sooner rather than later and don’t want to commit to a traditional lifetime annuity. The temporary annuity often offers a higher annuity rate compared to the lifetime annuity since the period over which the annuity is paid out is much shorter.
A postcode annuity involves basing your income on where you live. The reason for this is that some people who reside in different parts of the country may have shorter or longer life expectancies. As an example, if you live in a wealthy part of the country, you’re more likely to live longer compared to someone who lives in a low- income part of the country. If you’re more likely to live for a shorter period of time then you can expect a higher annual income from the annuity and a lower income if you live in a wealthier part of the country.
An investment linked annuity involves a plan in which part of the income is linked to investment performance and the other portion of the income is guaranteed. You’ll choose the guaranteed level of income and how much of your pension fund is used. The balance of the fund is then invested and will pay extra income based on how the investment is doing. You’ll receive a higher income if the investment is performing well, but you may only receive the minimum guaranteed amount if the market falls.
One of the most popular types of annuity, the purchased life annuity, is bought with money that’s not in a pension pot. This annuity can provide income for you and your family members for the rest of your life. This annuity provides the same option as a pension annuity, however, for tax purposes the annuity is treated slightly differently. A portion of each payment is actually treated as a return of the initial capital that you invested, which means it will not be taxed. The income will be based on your age at the time you signed up for the annuity.