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Pension Annuity Best Buys - Person aged 65 with £50K pension

  - Best Pension Annuity Rates UK (Person 65 years of age with a pension pot of £50,000)
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Pension Annuity Best Buys - Person aged 65 with £50K

Company Level without guarantee Level guaranteed 5 years Escalating 5% p.a. compound without guarantee Apply Today


£2640.00 p.a £2637.00 p.a - Proceed


£2608.08 p.a £2602.80 p.a £1324.20 p.a Proceed


£2592.48 p.a £2587.68 p.a £1301.04 p.a Proceed


£2551.10 p.a £2541.50 p.a £1285.41 p.a Proceed

Moneyfacts.co.uk Best Buys show the best products chosen by our independent experts. Where we have been able to we have also provided a link for you to apply via Moneyfacts.co.uk today. Products shown with a yellow background are sponsored products.

The figures and details shown are obtained from sources believed to be reliable. However, the accuracy and completeness of any information cannot be guaranteed and no warranty or representation is given and users must check all rates, conditions and details before finalising any arrangement. No liability can be accepted for any direct or consequential loss arising from the use or reliance upon this information.

 

What is an annuity?

If you want to secure a regular income in retirement and make sure it is paid for the rest of your life, a lifetime or pension annuity is still the only financial product that can promise this. An annuity is bought from an insurance company using the proceeds built up in your defined contribution pension pot.

How annuities work

When you choose to retire - any time from the age of 55 - you can normally take up to 25% of your total pension pot as a tax-free lump sum immediately. The rest of the pension pot can then be used to buy an annuity, which will continue to pay you a taxable income throughout the rest of your life. You no longer have to buy an annuity with your pension; the pension freedoms introduced in April 2015 mean you can now leave your pension pot untouched, take an income using pension drawdown, or even cash in your pension. A financial adviser will be able to give you more details and help you work out the best option for you.

Types of annuity

There are two main types of annuity that you could buy with a pension:

  1. A basic lifetime annuity: where the income you receive is set in advance.
  2. An investment-linked annuity: where the income you receive will depend on investment performance, but is guaranteed not to drop below a pre-set minimum.

Enhanced annuities

Each of these options may also be available as an enhanced annuity. If you have a medical condition, or make lifestyle choices that may shorten your life expectancy (such as smoking), enhanced annuities will usually pay you a higher income, on the expectation that payments will be made for a shorter period of time. Not all providers offer enhanced annuities, making it essential that you shop around for the best annuity rates if you think you may qualify for one.

Additional options and features

Lifetime annuities offer various options and features to cater for the different income needs of both the retiree and their beneficiaries.

Passing an income on

  • A single life annuity pays an income to the annuity holder for the rest of their lifetime. After this, the payments cease.

  • A joint-life annuity also pays an income to the annuity holder for the rest of their life. However, after that point an income will then be paid to a surviving spouse, partner or chosen beneficiary for the rest of their respective lifetime. How much this income is will be decided by the retiree: it could be exactly the same amount as was received by the annuity holder, or it could be half to two-thirds of that amount. However, the greater the proportion that is passed on, the lower the original income will be.

Guarantee periods

Opting for a guarantee period on your annuity means an income is guaranteed to be paid out for a set number of years, even if you pass away. If this happens, a spouse, partner or dependent will continue to receive the annuity payments until the end of the guarantee period. It should be noted that the longer the guarantee period, the lower the income that you are likely to receive.

Rising income

It is also possible to choose between a level annuity, where the income you receive is the same each year, or an escalating annuity, where income will rise each year. With an escalating annuity, there is usually a choice between an income that rises at a set rate of maybe 2% or 5% each year, and an index-linked income that rises in line with inflation. Choosing an escalating annuity will see a considerably lower income paid at the outset than on a level annuity.

How annuity rates are calculated

On a general basis, a number of factors can influence the annuity rates that providers are willing to pay. These include:

  • Life expectancy of the population: the longer people are expected to live, the lower the rate of annual income providers will be willing to pay, as it will have to be paid for longer.

  • Interest rates: if interest rates are low, providers will be receiving less on the pension money they have invested, and annuity rates are likely to be lower.

  • Gilt yields: providers also buy government bonds – or gilts – with the pension money they receive. The return they pay typically depends on interest rates and inflation, and if low, could lead to lower annuity rates.

On an individual basis, the provider will consider the following factors, which are specific to you, to determine the income you are eventually offered. These include:

  • Your age - the older you are, the better the rate you can expect

  • Your postcode - life expectancy can vary depending on where you live

  • Your marital status

  • Whether you smoke

  • Your health/lifestyle

  • The size of your pension pot

  • Whether you take a tax-free cash sum

  • The type of annuity you choose and the options you select.

What is the average interest rate on an annuity?

As of 31 January 2018, the average interest rate paid on an annuity on a single life, level without guarantee basis was 4.69%. For a pension pot of £10,000, this will deliver an annual income of £469.

The average interest rate paid on an enhanced annuity was 5.26%, equal to an annual income of £526.

The important thing to remember is that the actual annuity rate paid will depend on the individual's circumstances, and the type of annuity and the associated features chosen.

Annuity rates will also differ between providers, making it essential that you shop around before buying an annuity and compare annuity rates from different providers. Do not simply take up the annuity offer made by your pension provider; always look on the open market before buying an annuity.

Why are annuity rates so low?

Many factors are at play, but it is mainly due to the low interest rate environment and rising life expectancy.

When will annuity rates go up?

Given the wide range of influences that can impact annuity rates, it is nigh on impossible to predict when, or indeed, if annuity rates will go up.

Are annuities a good investment?

If you want to secure a regular income for the rest of your life, then an annuity is likely to be a good investment. Making sure you seek out the best annuity rates before making a final decision is a must. However, with the introduction of pension freedoms, retirees have more retirement options to consider than ever before - seeking financial advice is vital before making a final decision.

Can you cash in an annuity?

Quite simply: no. Buying a pension annuity is a once-in-a-lifetime decision. It cannot be sold, cashed in or transferred once bought. This only reinforces the need to find the best annuity rates and considering all the options before committing to a provider.

Is the income paid by an annuity taxable?

Yes, income received from an annuity is treated as earned income and will be taxed according to your own personal circumstances.

Do beneficiaries pay tax on annuities?

If annuity income is to be paid to a dependant when you die, this may not be taxable. If you pass away before the age of 75 and have a lifetime annuity, your dependant's income will be tax-free. Otherwise, their income will be taxed according to their personal circumstances.

If the remaining guaranteed payments are paid as a lump sum to a dependant or your estate, this could be subject to inheritance tax.

What happens to the money in an annuity when you die?

What happens next will depend on the type of annuity you have.

If you have a single life annuity with no guarantee period, your payments will end. If this concerns you, perhaps if you are in ill health, some plans offer value protection. This protects the full value of an annuity, or a proportion of it, and will pay out a lump sum to a beneficiary that is equal to the amount protected, minus the sum of the income already paid out.

If you have a joint-life annuity, income payments will revert to your spouse, partner or dependants as set out when you bought the annuity.

If you have a guarantee period on your annuity, income will continue to be paid until it ends.

What are the advantages of an annuity?

  • A guaranteed income for life.
  • You can protect against inflation with an index-linked or rising annuity.
  • Potential for a higher income if you have or have had certain medical conditions, or if you smoke or are overweight.
  • Your annuity income will not go down, even if your health improves.
  • You can ensure your spouse/dependants will receive an income after you pass away.

What are the disadvantages of an annuity?

  • Depending on how long you live, the income payments you receive may total less than you bought your annuity for.
  • Once bought, an annuity cannot be cashed in or transferred.
  • Inflation can erode the income paid by a level annuity.

What next?

Try our online annuity planner
Read our annuity guides

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