What is an annuity?
An annuity is, in essence, a form of ‘insurance.’ There are a number of different types of annuity, but essentially it’s a way of converting your pension into an income for the rest of your life.
In exchange for part of your pension fund, an annuities provider agrees to pay you a set amount of money for the rest of your life. The amount you will be paid depends on the amount of pension you convert, the type of annuity you take and even sometimes your health or lifestyle.
What if I get paid less back from an annuity than I put in?
An annuity is effectively an insurance policy and in much the same way you might never claim on a travel insurance policy or a home insurance policy, there is of course a possibility that you could buy an annuity for a certain amount of money and are never repaid that amount in full before passing away.
You can get certain guaranteed income types which guarantee that even if you die before receiving a certain amount of money back in the form an annuity income, your estate will receive payments up to a certain amount. But ultimately, we have to consider an annuity as an insurance policy. If you live for much longer than your life expectancy, for example, you could very easily receive more back in annuity payments than you put in. This is how providers are able to offer annuities like this – in some cases they pay more back than the annuitant put in and in some cases they pay out much less.
A number of different factors will affect the annuity rates that you are offered.
- The size of your pension fund
- The type of annuity you’re looking for
- The annuity provider quoting you (different providers offer different rates on annuities)
- Your age
Open Market Option
As you approach retirement, you’ll probably hear from your pension provider, letting you know what annuity rates you can expect for your fund.
A number of retirees simply take the annuity rates offered to them by their pension provider and think nothing of it. However, your provider is also legally obliged to inform you that you have the right to use the Open Market Option – basically, you can shop around!
You really should take advantage of this. Annuity rates vary from provider to provider and can even be influenced by your health and lifestyle habits in some cases. It doesn’t have to be complex to shop around and it could potentially mean you have a better income for the rest of your life!
The Open Market Option is there to ensure you get the best for your fund. Take advantage. It doesn’t have to be a difficult or laborious task. There are many qualified IFAs who can assist you in getting the best rates by using the Open Market Option and can do so for you quickly and easily.