While the increased flexibility in terms of pension income options announced in the March 2015 Budget may mean annuities will be less attractive for some, many will still have the requirement for a guaranteed lifetime income.

An annuity is a type of 'life policy' which enables the policyholder to enjoy a regular income in exchange for a lump sum of cash which is commonly built up through a pension scheme.

Under the new Pension Freedoms you can select the level of income to be received, but excessive withdrawals could lead to fund depletion.

If you purely want an income source without underlying investment risk then an annuity may be appropriate for you, the term is up to you, a fixed term annuity can be set up for a 3 year or for life whichever is preferred.

How they work...

Annuities, in the main, are supplied by Life Assurance Companies. The underlying 'annuity fund' is usually invested in fixed interest investments, such as long term government gilts in order to maintain the guaranteed income and ensure regular income payments are made to annuitants.

Annuities can be set up to provide different benefits / options:

  • Spouses/Nominee pension (to protect a spouse, by providing an income, following the death of the annuitant)
  • Guaranteed payment periods; 5 years is typical but 10 year guarantees are possible
  • Escalation of benefits; income can be protected from inflation - RPI linked escalation, alternatively a fixed percentage annual increase in income can be secured at outset e.g. 5%.
  • Annuity income can be linked to investment performance for example by a 'With Profit Annuity' or 'Unit Linked Annuity'
  • Fixed term annuities can be set up to run for a specified term and either provide a guaranteed maturity lump sum or to facilitate total fund depletion.

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