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

Planning for Retirement – Part 2

As discussed in the first part of this article, the earlier you start planning for your retirement, the more financially secure you can be during your golden years.

But most people get too caught up in the demands and pleasures of today and almost forget that there is a tomorrow.

If you still haven’t begun, then there is no better time than now to start planning for your retirement.

We discussed the first three decades of your employed life and the options you have at hand to plan for a secure future.

Despite it having a notorious reputation as the ‘selfish years’, you can inculcate good habits in your twenties and thirties which can form the bedrock of your retirement plan in the years to come.

The forties is the time when retirement is only a stone’s throw away and planning becomes a critical necessity.

Then come the Fifties.

In your 50s

Your fifties are unarguably the most important decade when it comes to financial planning.

You can see retirement on the horizon. You may have a date or a year in mind already.

This year should be enough for you to lay out a roadmap and calculate the minimum amount of money you need, to lead the lifestyle that you dream of.

There are tools like online retirement calculators which can provide you with a ballpark figure.

While it may just be a vague picture as online calculators very rarely account for taxes correctly, it should give you an overview of the many components that make up your retirement planning.

Now, it’s time to have an in-depth look at your pension investments. While most financial experts will advise you to take out risky investments like equities and opt for secure ones like cash investments, the fact is that there is no free lunch. Every investment option has its own pros and cons.

Hence, it is ideal to build a portfolio that has a mix of investments. A percentage of your investments should focus on high returns and another half should be safe and tested methods.

Spend as less as possible. The goal should be to maximize your contribution to your pension fund. All other expenses (mandatory and luxury) should be cut down.

If you were one of the early starters and have managed to accumulate a sizeable fund already, then you can consider investing in a Self Invested Personal Pension (SIPP) as it gives you greater control over your investments.

You may also think about buying an Annuity which can make a significant difference to your income in the years to come.

Your goals in this decade should be:

  • Layout a roadmap for your retirement
  • Reassess your pension investments
  • Try and create a portfolio with a mix of investments
  • Spend less and contribute more towards your pension funds
  • Review your finances periodically

The Sixties

The sixties is the home stretch. You are almost at the finishing line.

You may plan to retire in the early or later years of the decade.

You may also be fit enough to work beyond the sixties adding to your pension pot.

With increased life expectancy, your retirement period could last up to three decades. And it is important that your retirement income should last as long as you do.

So, making the right decisions regarding your pension fund which will be the source of your income and cash in the years to come, is crucial.

So, it’s time for reassessment.

These are some of the questions you may want to ask yourself.

  • Are your debts cleared off?
  • Do you still have a mortgage?
  • Are there dependants on your payroll?
  • Have you considered where you wish to live or have major expenses (house repair or buying a car)?

You need to remember that you will be transitioning into a phase where you will have to create a fixed income every month. And it is crucial that you have your debts and expenses in order.

Speak to an Independent Financial Advisor before you make an important decision.

Read our article, ‘How to Select a Financial Advisor’ for more information.

Now, it is time to prepare for retirement as you enter your seventies and beyond. Your planning is the key, to living comfortably through your retirement years. So plan wisely.

You may also look at our Complete Pensions FAQ page for more information.

Planning for Retirement – Part 1

For most Britons in their twenties or thirties now, retirement seems like a distant proposition that can wait.

Oh, there’s still time to think about what one would do in their sixties. Isn’t there?

Not quite.

Ineffective retirement planning or the complete lack of it can leave you in the doldrums without enough income to sustain your current lifestyle.

It is estimated that more than half of the people in the UK are not saving enough or not saving at all, in order to live the kind of life they expect in the golden years.

This brings us to the most important question.

How much income do you need to maintain or upgrade your current lifestyle during retirement?

Understanding Retirement

Before calculating one’s income, it is important to understand, that retirement may not necessarily be three decades away anymore.

Many people wish to retire earlier while they still have good health, to enjoy travel and other leisure activities.

Others may wish to continue working beyond state pension age.

The first option leaves you with a risk of having a smaller state pension pot when you retire.

The second allows you the luxury of delaying drawing your state pension which means, you retire with a bigger amount.

While travel and leisure seem like an attractive part of retirement life, it is only prominent in the initial years. One needs to account and plan for healthcare costs, during the later stages of life.

All this information may seem overwhelming but it is not that difficult to ensure that you are not left cash-strapped during your golden years.

Here’s an easy-to-understand decade-by-decade guide on how to plan for your retirement income.

The 20s

The 20s are a period of turmoil in a young person’s life and there are quite a few bumps to manoeuvre. So, at this stage, your main goal should be to pay off debts if any and begin saving, no matter how paltry the sum may seem.

  • Goal 1 – Clear Debts
  • Goal 2 – Start Saving
  • Goal 3 (Optional) – Start an ISA

Having said that, this age is also perfect to start your retirement plan and one of the best ways to do it is to start a tax-free ISA. You have flexible access to the money if and when, you do need it. You are building a financial resource for the future and yes, it also allows you to make ‘savings’, a habit.

The 30s

With the 30s come new responsibilities and new challenges. You may plan to get married, buy a house or start a family. Financially, you need to play your cards right in this decade. So sit down with a pen and a piece of paper and reassess your finances.

  • Do you have expensive unsecured loans like credit cards?
  • Do you have other debts like student loans?
  • Are you planning to buy a house soon?
  • Are you saving for a contingency fund?

Once you have a clear picture of your financial outgoings, you should execute a plan towards reducing it. Work on clearing off debts first. Once you are debt free, it is time to start exploring your retirement options.

Your company may have a pension scheme that you can enrol in. Explore your options when it comes to pension schemes. The default one may not be your only choice. You can take more risks at this stage. Consider investing in shares.

The 40s 

The 40’s are usually a great time financially. You have pay raises, bonuses, your debts are cleared off and you can now start thinking about dedicating a significant amount towards your retirement income.

Yes, this is a critical period for your retirement savings. What was an option to be considered two decades ago, now becomes a crucial necessity.

Ideally, you should have some sort of retirement savings by now. But if for some reason you do not, then you are not alone. Many people start in their forties and still end up with a sizeable retirement pot. Only, it may take more effort. As Albert Einstein once famously quoted, ‘Compound Interest is the eighth wonder of the world’. Start early and you will need to save less.

Your goals during this decade should be to:

  • Dedicate more money towards retirement savings
  • Add to your ISA
  • Start saving if you still haven’t started

Do read the second part of this article to get information on retirement planning in your fifties and sixties, the years that will lead up to your retirement.

How to Select a Financial Advisor

There is such an abundance of information about pensions and retirement online that retirees can make the mistake of trying to cut corners and making crucial financial decisions themselves.

If one thinks closely about the implications that such a decision may have in the next few years, the thought can be scary.

One small mistake while buying an annuity or while choosing an investment fund, can virtually change the way your life unfolds in the twilight years.

SEE ALSO: What is an Annuity?

All those years of planning, saving, and preparation can be undone in minutes.

That’s why most financial experts and even the government encourage you to seek independent financial advice before you make decisions about your pension.

It is not very expensive, and the information and advice you receive can be very well worth it. In fact, you should consider it as an investment in its own right.

How to find financial advisors

One of the easiest ways to find a financial advisor is to ask for recommendations from your colleagues or friends who may have hired their services.

However, the catch is that it may not always be possible to gauge the quality of the advice provided that a few years pass.

There are other public resources which can be a valuable source of impartial information about Independent Financial advisers who are regulated by the Financial Conduct Authority (FCA). Here are some of them.

  1. The Unbiased Web Directory (www.unbiased.co.uk) lets you search for a financial advisor close to you by entering your postcode
  2. Vouched (VouchedFor.co.uk) is a review based website that provides ratings and reviews written by genuine clients of various financial advisors. It is a good resource to analyze the services of financial advisors.
  3. The FCA (The Financial Conduct Authority) register allows you to check and know if a financial adviser you selected is an authorized one

What should you look for

Financial advisors come in all shapes and sizes and have varied areas of expertise.

Since you are looking for advice regarding retirement income, pensions, and annuities, you should look for an adviser who is skilled and qualified in those areas.

  • Check if they are qualified. Although all Independent Financial Advisers are required to be qualified to a certain minimum level (Ofqual accredited level 4 qualification), any additional qualifications will be a plus.
  • Check their expertise. A financial adviser who has been around for the last few years will certainly be a better choice than someone who has recently started their practice.
  • Ask for references to see if their clientele has mostly been people who had similar requirements as yours. A diverse clientele does not necessarily mean that they cannot provide you with good advice.
  • Check the fees beforehand. As per the RDR – Retail Distribution Review dated 31st Dec 2012, you can choose to pay fees upfront for the services, or you can choose to pay them a commission from the amount you invest in a product that they recommend. But do not slump for the first quote you receive. Get quotes from multiple financial advisors.
  • Ask if they are an independent adviser who will be able to provide you with impartial advice and offer a broad range of investment options. If the adviser only offers a limited number of investment options, then they may be a ‘restricted’ advisor.
  • Ask if you will be provided on-going advice if necessary and what it will cost you.
  • Look for advisers who agree to meet you face-to-face, free of charge. Usually, a direct meeting is a better way to understand if you are dealing with the right person.

The Preparation

If you have selected a financial adviser, then the next step is to ensure that you prepare well for the meeting. They will first try to get a clear picture of your investments and if applicable, that of your partner or spouse.

So prepare a list of all relevant details like your assets, liabilities, existing policies, private pension plans, investments, power of attorneys, wills, employment pension schemes, payslips, national insurance number and any other information which you think may be relevant.

You may also look at our Complete Pensions FAQ.

Types of Annuities

Despite the new changes to Pension rules that came into effect in April 2015, most retirees still consider it a better choice to get a fixed income for life, also called an Annuity.

If you have considered your current financial circumstances and have decided that an annuity is the right choice for you, then it is imperative that you buy the correct type of annuity.

Yes, buying an annuity is a task that requires a fair amount of forethought because it is mostly an irreversible decision. Your choice of annuity will also determine the fixed-term income/ monthly income you and possibly, your dependants may receive for the rest of their lifetime.

There are different types of annuities and your choice should depend on your individual financial requirements.

1. Lifetime Annuity: A lifetime annuity provides you with a fixed lifetime income based on your life expectancy and current annuity rates. There are two varieties of Lifetime Annuities.

  • Basic Lifetime Annuity where you can fix your income beforehand. Once again you have the option of choosing between a single life annuity (income only for you) or joint life annuity (if you wish to nominate a beneficiary to receive the income after your death)
  • Investment Linked Annuity is a type of fluctuating income annuity where the income depends on the performance of your investments. There are two different types of Investment Linked Annuities. One is With-Profits Annuity where the income is dependent on the performance of the With-Profits funds of the Annuity Provider. The second is Unit-Linked Annuity where the income will be dependent on the funds that you choose to invest in.

In a lifetime annuity, the annuity rate will be the income that you will receive on every £ that you have accumulated in your pension pot.

2. Enhanced Annuity: An enhanced annuity is normally offered only to people who may have a shorter life expectancy. For this reason, it offers a higher annuity rate which means, a higher retirement income. Some of the criteria for eligibility include:

  • Smokers or a past history of smoking
  • A health condition or disease
  • Obesity
  • A work or employment history in a potentially hazardous environment

The insurance company may ask additional questions before you are considered eligible for an enhanced annuity.

3. Impaired Life Annuity: These are offered to people who suffer from or have suffered from any medical condition which may have reduced their life expectancy. Annuity providers seek complete information on the medical history of the annuitant and additional medical examinations may also be required.

4. Post Code Annuity: A Post Code Annuity offers you a customized annuity rate on the basis of your area of residence. People living in wealthier areas typically receive lower annuity rates as their life expectancy is considered to be higher than that of people living in poorer areas.

5. Temporary Annuity: A temporary annuity pays you an income for a fixed time period or until your death (whichever is earlier). The maximum term period for this type of annuity is five years and hence, it gives you a far higher annuity rate as compared to an equivalent lifetime annuity. You will only need to use a part of your pension pot to purchase a temporary annuity.

6. Investment Linked Annuity: This is a hybrid plan that gives you a partially guaranteed income while the rest of the income is dependent on the performance of your investments. You can select the guaranteed income you need and use a part of your pension pot to buy an annuity which would provide that. The rest of the pot will then be invested and will provide you with additional income on the basis of the returns that these investments generate. If the investments perform well, the additional income will be significant. If the markets are not performing well, then you will only receive the minimum guaranteed income.

7. Purchased Life Annuity: A purchased life annuity, also known as a PLA is a special type of annuity that can be purchased with your income or savings fund that is not part of your pension pot. You may also buy it with the 25% cash lump sum which you may draw from your pension fund. It will provide you with a fixed monthly income but has different tax implications.

8. Fixed and Increasing Life Annuity: A fixed income or a level annuity will pay you a fixed income for the rest of your lifetime. On the other hand, an increasing or escalating annuity will provide you with an ‘inflation-proof’ retirement income. An increasing life annuity has two varieties:

  • Index Linked: Your annual income will be adjusted according to a designated level of inflation which is usually based on the Consumer Price Index or the Retail Prices Index. So, if inflation rises, your income increases too. On the contrary, if inflation reduces as it happened in April 2015, your income may reduce also. But its buying power is retained no matter which way the prices go.
  • Increasing Rate: Your income will increase every year at a set rate which can be selected by you at the start of the annuity term. It can be between 0.8 to 5%. The rule of thumb is that the higher the percentage by which you want the income to increase each year, the lower the starting income will be.