Simply put annuities are an agreement with someone like an insurance company whereby you give them a lump sum and they agree to pay you an income for life in return for the lump sum. In the UK, most people buy an annuity with their pension pot.
Prior to April 2006 it was obligatory to take out an annuity for your pension. However, now, under certain circumstances, you can now set up a drawdown income direct from your pension fund. This means that the cash you have accrued in your pension remains within that pension fund. However, because of inheritance tax and other factors the vast majority of pensioners are still better off taking out an annuity.
When to Start Looking for Annuities
When you bear in mind that the annuity you take out determines your income in retirement you can see that shopping around and taking your time before buying one is vital. Ideally, you need to familiarise yourself with all of the options several years before you are due to retire. That way when you come to actually retire and buy an annuity you will have a very in-depth understanding of what they are and the kinds that you can buy. Armed with this knowledge you will be able to shop around and find the best deal for you.
You can convert any money that you have already invested in a pension into an annuity between the ages of 55 to 75. When you are nearing retirement the fund that you are saving with will usually offer you an annuity. However, it is important not to simply accept their annuity offer. Rather, you need to shop around and see what other companies are willing to offer you.
Always Seek Independent Advice When Buying Annuities
The best advice is independent advice i.e. from those people who are not involved in actually selling annuity products. The IFA maintains a list of truly independent financial advisers, people on this list are the ones that you need to speak to. Once you have their advice you can start speaking to companies that actually sell annuities.
Age Partnership offer quotes for a wide range of annuities. They pull together quotes for you from a wide range of companies and present you with the best options.