Annuity / Open Market Option

An annuity is a type of policy that pays a regular income in return for a lump sum. An annuity is predominantly bought with a person's pension fund when they retire. When someone says 'I've started taking my pension', they may well mean they have bought their annuity. Annuities are provided by life assurance companies and most annuities are what is known as lifetime annuities, as they promise to guarantee an income for the rest of your life.

For example, assuming you have £100,000 to purchase an annuity with, you may receive an income of £5,000 each year for the rest of your life. Depending on your circumstances you may receive more income or less income.

One thing is certain about annuities – it is ALWAYS sensible to shop around – unfortunately most people aren’t aware they can get a better deal on the ‘open market’. Around two in three people take their annuity with the company they built up their pension funds with, rather than shopping around. People who do shop around can find that they can increase the income available to them by 10% to 15% or more. Why would anyone not wish to give themselves a 10% pay rise by taking their 'Open Market Option'.

When considering how much annuity income to offer you insurance companies consider things like your age, whether you are a man or woman, whether you smoke, the area you live in and your state of health. This is because these factors have a bearing on how long you might live for – and if you have a longer life expectancy the insurance company is more likely to offer you less income each year, as they have to make the money you give them last longer. Also the opposite is true, if the insurance company thinks you have a shorter life expectancy they are more likely to offer you more income each year.

Some providers of annuities offer temporary annuities, which pay out an income for a pre-determined amount of time and there is money left at the end to purchase another annuity at the end of the set term.

There are lots of different options to choose between when selecting an annuity. With lifetime annuities, the level of income and selected options cannot be changed once the annuity is in place and so it is really important that the correct options are chosen at the outset.

The most common annuity options are:

• Level of tax free cash
• Spouse’s or partner’s pension
• Annual income increase
• Payment frequency
• Payment in advance or arrears
• Guarantee period

As you can see there are many different annuity options available with many different combinations, which can be bewildering for most people, and shows exactly why annuity advice is needed. Given that your choices are so important we suggest everyone speaks to a Financial Advisor regarding their annuity to ensure they not only understand what annuity options to choose, but also to find the best level of income.

If you are a smoker or have any health issues such as high blood Pressure, cholesterol, or even more serious conditions such as cancer, then you may qualify for an Enhanced Annuity.

To find out how an annuity works please use our Interactive Annuity Guide.