Conventional Annuities

Conventional annuities, also referred to as traditional annuities, are the oldest and most common type of annuity available. They are available from life assurance companies and must be bought from the proceeds of a pension plan.

Rates vary considerably and it is very rare for your pension provider to offer the highest rate. Fortunately, all pensions have something called the Open Market Option and this will allow you to shop around and buy your annuity from the compan y offering the best rate.

Once you have bought a conventional annuity you cannot change your mind, for this reason you should consider your options carefully and take advice. There are other types of annuity that allow you to make changes at set times in the future, these are called term annuities.

An annuity comes to an end when the lives assured (that is you and maybe your spouse\partner) die, although you may choose to include a guarantee which means the annuity will be payable for a minimum period, afterwhich no further payments will be made. If you die relatively young the income that you receive could be significantly less then the amount invested, conversly if you live a long life you may get back more than originally invested. If this concerns you then you might wish to consider term annuities or alternatively secured annuities.

Who should consider Conventional Annuities?

Anyone that has a pension fund as they must use this to buy an annuity. They will be most suitable for people that require a level of income that is known from the outset and will not change unless specifically designed to do so (escalating annuities).

Of all the annuitiy types available, a conventional annuity is the safest, so it is most suitable for people that cannot take any risks with their income, usually because this annuity income will make up a good proportion of their overall income in retirement.

What are the main options are available?

You can choose to include a partner or spouse who can receive an income after your death - this is known as a joint life annuity. The amount of income that your partner receives will eb determined when you commence the annuity, it could range between 25%-100% of the annuity that is payable to you.

A guarantee can be included usuallly at very little cost. This ensures that income is paid for a minimu period, irrespective of how long you live. You could choose a 5 or 10 year guarantee.

Income can remain level throughout payment or increase in line with inflation or a fixed percentage (for example 3% or 5%). This is called escalation. If you choose for income to increase it will initially start at a lower level. We have a very useful calculator that demonstrates this graphically thus showing the point at which income from various annuities converge.

There have been several developments in the annuity market which enable you to consider more diverse annuity products. These may or may not be suitable for you but at least consider them before deciding to buy, we will be happy to discuss your needs. Decision Tree