Beginners’ Guides

Beginners’ guide to pensions and retirement

Annuities (Secured Pension):

An annuity is a plan which provides regular income payments or ‘instalments’ for life, in exchange for a lump sum (your pension pot). Once you have decided to buy an annuity, you must choose which type suits your needs. Once you've chosen an annuity, you won't be able to change or cancel it.

Level annuity. Your payments are fixed at the outset and continue at this level until you die.
Escalating annuity. Your payments can change each year. For example, you may choose an annuity which increases at a fixed rate each year of, say, 3% or 5%. Or you may choose an annuity which changes in line with the Retail Prices Index (RPI), commonly referred to as the cost of living. It is likely that your annuity payments will initially be less than that available from a level term annuity.
Unitised annuity. If you buy a unitised annuity, you link your income to the performance of an investment fund or funds. This means your pension income could go down or up. There are typically no guarantees.
Enhanced annuity. (Sometimes called impaired life annuities). People with medical conditions which could reduce their life expectancy such as high blood pressure, cancer or diabetes could get a higher income from their annuity. They’re paid more because the annuity company believes their life expectancy is less.

Before you buy here are a few questions to ask yourself:

Do I want to provide an income for my spouse, partner or any dependent children when I die? You can choose to buy an annuity which will continue to be paid to your spouse, partner or dependant(s) following your death.
Do I want the payments to be guaranteed? This means they’ll continue to be paid for the guaranteed period (typically five years, but can be as much as ten) regardless of whether you die within that period.
Do I want the income to remain level or increase or change as time goes on?
Do I want to be ‘locked into’ a plan for life? Other options may provide you with more flexibility.

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Please bear in mind

You should always take financial advice before making any decisions about how to take your retirement income.

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