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When you reach your retirement date, the pension fund you’ve been paying in to doesn’t automatically start paying you an income. To convert it to an income, you have to buy another product and an annuity is one of these products. A Pension Annuity converts your pension savings into a secure income for your retirement no matter what happens with the stock market or interest rates.

You Have A Choice

When you reach your chosen retirement date your pension company will probably offer you an annuity. Don’t assume that because you’ve been with them for a long time they will automatically pay you the best rate on the market. They might not and you could miss out on a lot of income over your lifetime. You don’t have to accept this offer… you have a choice!

You can shop around to see if you can find a better deal from another annuity provider; this is called using the Open Market Option.

Even More Income?

  • Do you smoke?
  • Do you have medical conditions?

Most pension providers don’t take these things into account when making you an offer.

If you have medical conditions or if you smoke, the whole market will be searched to find a number of specialist annuity providers to see if you can get an even higher rate!

The Open Market Option

Government legislation, called the Open Market Option, states that you don’t have to buy an annuity from the same company that you have your pension fund with. The Open Market Option means that you’re free to shop around to find the best annuity you can. If you can find a better offer than the one your pension company’s made you, you’re entitled to buy your annuity from there instead.

Your pension company will send the money to the new provider and your annuity will be paid by them. Every pension provider that offers an annuity has a different rate – some of these are good, but some are very poor compared to what else is available. Whether or not you’re offered a good deal depends on who your pension is with so it’s important to check.

Remember, if you’re buying a lifetime annuity the extra income you receive by shopping around is paid out for the rest of your life. You can only buy an annuity once so it’s important to get it right.

How is an Annuity Calculated?

Basically, the insurance company (annuity provider) that sells you the annuity, estimates how long they think you’re going to live and works out how much they will pay you each year. This income is then guaranteed for the duration of the annuity, which in the case of a lifetime annuity is for the remaining years of your life.

You can tailor your annuity to fit your personal circumstances with a number of options. The annual income you will be paid generally decreases as you add more features to your annuity.

Tax free cash lump sum

The tax free cash lump sum can be up to 25% of the value of your pension fund(s) and it can be used for whatever you choose. The rest of your fund is then used to buy an annuity and the income is taxable at your normal rate.

Single or Joint Life Annuity

You can choose to have your retirement income continue to a spouse, civil partner or someone who is financially dependent on you after your death, either at the same level or at a lower level. If you choose this it is known as a Joint Life Annuity.

If you choose this option, if you die first, your spouse, partner or dependant will continue to receive an income for the rest of their life.

Guarantee Period

A lifetime annuity will pay you a regular income until you die. You can choose to guarantee that income payments are paid for a minimum period of time, up to a maximum of 10 years, even if you die before the end of this guarantee period.

Value Protection

There is an option offered by some of the annuity providers that guarantees to return the difference between what you paid to buy the annuity and the income you have received from it up to your date of death. The difference will be paid to your nominated beneficiary, minus a 55% charge for tax.


The buying power of a fixed income will generally reduce over time due to inflation. You can choose an option to reduce the effects of inflation.

Level Income (no increase) – The same annual income for the rest of your life.
Fixed increase – Your annual income increases by a fixed percentage of up to 8.5% each year.
RPI increase – Your annuity moves in line with the Retail Price Index (RPI) and keeps track with inflation.

Receiving Your Income

There are four payment options – monthly, quarterly, half-yearly or yearly and you can choose when you would like to receive your payments – in advance or in arrears.

Enhanced Annuities

Annuity providers work out your guaranteed income by forecasting how long they think you will live. As a rule, the more conditions you have that might reduce your life expectancy, the higher your income will be.

Providers estimate this by looking at a number of things, including where you live, your age, your gender and whether you smoke, along with any current or previous health issues including if you’re overweight or if your blood pressure is high, because these are factors known to reduce life expectancy. The annuity providers will make an educated guess and pay you an amount of money according to how long they think you’ll live.

Remember – enhanced lifetime annuities offer a guaranteed income for as long as you live so if you have any of these conditions and you qualify, your income will be higher and never go down.

Not all annuity providers offer enhanced annuity rates so if you’re eligible for an enhanced rate annuity you may not get one from your current pension provider. If you can answer yes to one or more of these three questions then you could qualify for a higher income.

– Do you smoke?
– Do you have any condition that is controlled with prescription medicine?
– Have you ever been in hospital?

If you’re not sure whether a condition is relevant, just let us know. Something that you might not think is important could mean that your income increases for the rest of your life!

Please call The Right Equity Release on 0800 612 6755 to find out more information

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