There are many types of annuity available in the UK today. The amount of choice can be bewildering even for those who think they might have a pretty good understanding of financial products. Whilst this is part of the reason undoubtedly why so many people fail to get the best annuity deal, it is also essentially a good thing as it means those who have been savvy enough to shop around, will find that they have plenty of annuity products to choose from.
Today we present a list of the seven main annuity options on the table.
1) Level annuity
As you might imagine from the name, this annuity pays a set amount every month. The amount you receive at the start of the annuity will be higher compared with more variable/flexible or risk-based annuities, but this amount will never increase. Although this is a favourable option for those who want a dependable and reliable income, it does mean you cannot take advantage of better market conditions should they occur . You are also not protected from the risk of rising inflation. In real terms your income is going down every year as prices go up. Level annuities are a popular choice with annuitants who have smaller pension pots.
2) Percentage increasing annuity
This type of annuity has incremental increases built into it, so your income will rise by a set amount each year. This could typically be around 3% annually for a set number of years, such as ten years. However your starting income will be substantially lower compared with a level annuity for example. It can help alleviate the effects of inflation though.
3) RPI-linked annuity
With this type of annuity, your income rises in line with the Retail Price Index or RPI. Your starting income is lower compared to level annuities, but you can be sure to guard against hikes in inflation. However, these are not always as beneficial as they appear as some providers will drop your income when the RPI falls. For a more comprehensive explanation, read our section on inflation-linked annuities.
4) Enhanced Annuity
The single most important thing you should check when looking for an annuity is whether you are eligible for enhanced rates. These are offered on the basis that your life expectancy is reduced due to your health or lifestyle choice. Providers are slowly becoming more forensic when it comes to checking people’s health and lifestyles, which is general means more people are getting better rates. Increases can range from 5% to 40% for the most serious medical conditions.
5) Single life annuity
A single life annuity means that when you pass away your income stops and will not be deferred to your partner
6) Joint life annuity
When you pass away you can choose the proportion of your annuity income you wish to be transferred to your partner.
7) Investment linked annuity
Standard or conventional annuities offer predictability over income, which is why they have proved popular with annuitants. However, the rates are based on the yield from government bonds (gilts) and if these are low at the time you apply for an annuity, your income will suffer as a consequence. With rates being at an historical fifteen year low, many people are looking at the option on an investment linked annuity also known as an asset-backed annuity. Your pension fund will be invested on your behalf with various degrees of risk depending on which investment funds you opt for.
There are various options for those seeking an investment linked annuity, but they all have the same premise which is that you are willing to take an element of risk in order to benefit from potential gains.
These are just the main types of annuity on offer, there are many hybrids of each as the market becomes more specialised. With rates being lower than in the past, pension annuities have come in for criticism from some quarters for being too rigid and restrictive. However, with so much choice now on the market, pension annuities can compete much better with other pension options such as income drawdown.
