Guide to Annuity Jargon

If you find yourself at your wit’s end trying to figure out the meaning of certain ‘terms’ in your pension manager’s sales pitch, you are not alone.

A lot of retirees face the problem of having to deal with an abundance of technical jargon when they first speak to insurance experts.

Unless you work in an insurance company or are a qualified financial adviser or have read about these things, it is normal to be confused.

Here’s our guide that should help debunk these arcane terms about annuities.

  1. Annuitant: The annuitant is the person who purchases the annuity
  2. Escalating Annuity: A type of annuity in which your income increases by a set percentage every year which can be specified by you. The higher the percentage you select, the lower your monthly payout will be initially.
  3. Index-Linked Annuity: A type of annuity in which your income will rise in line with rising prices (inflation). Either the Retail Prices Index (RPI) or the Consumer Prices Index (CPI) is used as a reference.
  4. Compulsory Purchase Annuity: It was compulsory for every citizen to purchase an annuity before the age of 75. This rule was changed in April 2006. Hence, the term Compulsory Purchase Annuity is an obsolete one.
  5. Capital Protected Annuity: A type of annuity in which your entire pension pot will be returned to a nominated beneficiary in the event of your death before a set time period. The returned amount will be subject to 35% tax.
  6. Enhanced annuity: A type of annuity with higher rates offered to retirees who may have a shorter life expectancy due to certain medical conditions or lifestyle-related conditions. For example, people with cholesterol, cancer, those who smoke or those who have recently quit smoking may be eligible for it.
  7. Guaranteed Time Period: A specified time period (5 or 10 years) for which, your annuity payment will be paid even in the event of your death. You can choose whether you want the remaining payment to be paid as a lump sum or as a regular income.
  8. Investment Linked Annuity: A type of annuity in which one part of your pension pot will be used to provide you with a low minimum guaranteed payment. The remainder will be invested in funds and the further income provided will be variable.
  9. Joint Life Annuity: A type of annuity in which your dependent spouse, civil partner or children will continue to receive the annuity payment for the rest of their life or a set time period, in the event of your death.
  10. Single Life Annuity: An annuity in which you will be the only annuitant who will receive the annuity payments for life. The payments will stop upon your death. If you have selected a guarantee period, then the payment will continue till that period.
  11. Level/Fixed Annuity: An annuity where the income will remain fixed for your lifetime.
  12.  In advance: The type of payment frequency you select in advance. For example, if you select a payment frequency of quarterly in advance, you will receive your payments at the completion of three months.
  13. OMO (Open Market Option): An annuitant’s right to shop around to find the best annuity rate by seeking quotes from multiple annuity providers
  14. Payment Frequency: The frequency at which you receive your payments. Can be monthly, quarterly, half-yearly or yearly.
  15. Postcode Annuity: A specialized type of annuity which is offered on the basis of the area where you live. A postcode annuity is based on the thought that people living in poorer areas may have a shorter life expectancy and people living in a richer locality may have a longer life expectancy.
  16. Purchased Life Annuity: A type of annuity that is not purchased using the money in your pension pot. You can use your pension commencement lump sum or any other funds that you may have saved.

RELATED: Types of Annuities

Taking Care of Your Dependants During Retirement

If you are single, then planning for your twilight years becomes a relatively easy task.

You just have to ensure that you follow the recommendations made by your pension provider and create a right mix of investments which should provide you with a fixed monthly income for the rest of your life.

But if you have a spouse, an ageing parent or children to provide for, then your retirement plans must make provisions to ensure that the income you receive must be enough for them as well.

Also, you must consider the fact that they might live on after your death, requiring a stable income for the rest of their lives. Factors like your current health, healthcare costs and increased life expectancy should be a deciding factor when you plan your retirement income if you have dependants.

There are multiple ways to do this and you must ensure that you consider the pros and cons of each option before you select it.

Nominate before retiring

If you have a defined benefit pension scheme at your workplace, such as a final salary or average career scheme, then it allows you to choose one or more nominees to receive your pension pot, if you were to pass away before retiring.

Ensure that you fill this form beforehand. You may also need to update the information in this form or change the names if your financial or familial circumstances change.

Plan your finances 

Depending on the type of pension plans you have invested in and the amount of pension you have accumulated, you can get a good idea of the amount you can receive each month.

You can use online tools like Pension Calculators or use the services of a financial expert to get a better idea.

In addition to this, your spouse or civil partner may have a pension pot of their own.

Plan how you can use the pension pot to provide an income that allows the two of you to live comfortably. Once again, either partner can nominate the other to inherit the pension, in the event of death.

After the introduction of new reforms in April 2015, you now have multiple choices to access your pension pot.

Read our article – Options for using your pension pot

Invest in an annuity

You can choose to take 25% of your pension pot as a tax-free cash amount. The rest can be used to purchase an Annuity.

An annuity will provide you with a fixed monthly income for you and your spouse for the rest of your lives.

There are different types of annuities and ensure that you choose one that can provide for your dependant after your death.

  1. Joint Life Annuity: If you choose a Joint life annuity, any financial dependant or nominee you choose will continue to receive an income in the event of your death.  (In most cases, for the rest of their lives). It can also be used to pay your dependent children until they reach the age of 23. The income your beneficiary will receive after your death will depend on the income paid out to you while you are alive. The lesser you choose to be paid while you are alive, the more your dependent beneficiary will receive and vice-versa.
  2. Guarantee Period Annuity: A guarantee period annuity will pay you a fixed income for a guaranteed period of time. This may be 5 or 10 or 15 years depending on the scheme you choose. So, if the annuitant (a person whose pension was used to buy the annuity) dies five years into the period, the dependent person will receive the guaranteed income for the remainder of the term. However, if your partner or spouse outlives this term, they will not receive the income. There is also an option to buy a Joint annuity together with an annuity.
  3. Capital Protected Annuity: A capital protected or value protected annuity will pay your dependant a lump sum cash amount rather than a monthly income, after your death. The cash amount will be the remainder of the pension pot after deducting the income already paid out to you before your death.