Annuities

An annuity is a way of ensuring you have an income in retirement.  For most people, annuity income is paid once a year, but sometimes every month for other people.  It is a type of investment that you can buy to make sure you have a steady stream of income for years to come.

There are two ways to classify annuities.  Different types of annuities can be categorised in two different ways.

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The first is the difference between lifetime annuities and fixed-term annuities.  A lifetime annuity (or life annuity) guarantees an income for you for the rest of your life, and often for the rest of a nominated person after you die.  If it does the latter, that is known as a joint life annuity.  A fixed-term annuity covers you for a fixed period and will pay you an income for a set number of years.  After the time is up, you have the option to receive one large lump-sum payment or to continue earning your regular annuity income.

Your payments can also be varied.  The payments are called pension annuity rates, and the different ways in which this can happen are ‘fixed-rate’ and ‘variable’.  Fixed-rate annuities give you a set amount of income, regardless of anything else.  Variable annuities are available too, with differences in them.  Most variable annuities offer you the choice in which investments you make, and your income depends on how well these perform.

You can also get fixed-indexed annuities which change based on how certain stock markets or currencies perform.  These used to be known as an indexed equity annuity.

You can also consider deferred annuity and an immediate annuity.  An immediate annuity will start paying you back as soon as you buy it, although the payments might be slightly less.  A deferred annuity will pay you back more, but won’t start the payments until a specific date.

What is a drawdown pension? Is it different from an annuity?

It is common for people not to understand their pensions and annuities correctly.  Often, people with a pension don’t know what a drawdown pension is and how it differs to an annuity pension.

Annuities and drawdown pensions are different.  A drawdown pension is taken from the pension provider you paid into while working. An annuity is bought from a separate company with a lump-sum of money.  Annuities are sold mostly by specialist annuity providers or insurance companies, but other investment and wealth management companies will also provide the service.

Various types of drawdown pensions exist, such as capped drawdown pensions.  These are all types of retirement income which are regulated by the Financial Conduct Authority and also differ to an annuity.

Are annuities a good investment?

Often, annuities can mean less flexibility for people.  While they can be perfect for some people because of their high rate of return and their security in how much you receive, they can also be risky.  When you buy an annuity, you will have to lock away a lump sum for a set period, which can be up to ten years in some cases.  This means that unless you pay a hefty fee, you won’t be able to access your cash until that time is up and the money stays invested.

Sometimes, as with anything, annuities can be mis-sold to people, too.  Annuities are mis-sold when there is a level of dishonesty from the salesperson or company who sold you the annuity.

For instance, they should always inform you of your right to shop around with other companies to look for a better rate.  This is the case even when you are considering buying an annuity with a company you have either saved your money with or if you have pension savings with them.

The companies must also ask you about your lifestyle and habits, as well as any health or medical conditions you have.  They also need to take into account any other considerations you have requested.

How much annuity will you get?

When you buy an annuity, you will be told how much the company is offering you.  This will be done in three ways: how often they will pay you, how much each payment will be, and how long this will go on for.

Most annuities are paid annually, but some are paid monthly.  The amount you receive will be a percentage of the initial investment.  Much like with a regular pension where your income varies with the size of your pension pot, annuity amounts will vary with the amount you invest. If you invest £100,000 at 5%, then you will receive £5,000 per year on the investment.  The annuity will either be life-long or limited in its period.

Be aware; annuity income is subject to income tax.  If you are recently retired and are taking out a fixed-term annuity, it might work in your favour to wait until the next tax year before the first payment, as you can sometimes pocket more of the return.

Mis-Sold Annuities

If you feel that the company you bought your annuity from was dishonest, or didn’t ask the right questions from you, then you are likely to be able to claim against the provider.  To make a claim, you need to have any documents from when you bought it, and any paperwork you have relating to it from since then.

If your pension company sent you letters from the time you bought an annuity, you would also need these letters, emails or forms.

Why do companies mis-sell annuities?

Annuity companies will mis-sell annuities to people when they think they can make more money off them if they are dishonest.  While this is wrong, and also illegal, they do it because they believe they can get away with it.  This is why it’s important to check whether you can make a claim and get the money you are owed.

Check if you were mis-sold an annuity

The rules of selling annuity are organised by the Financial Conduct Authority (the FCA).  The FCA will try to make sure all providers are authorised and regulated, to make sure they comply with the rules and don’t mis-sell.  There are many ways in which annuities can be wrongly sold, and here is an overview of these.

If you smoke, are overweight, drink a lot, or have any other health condition, then you are often able to find annuities up 30% higher than other people.  If the company failed to tell you about this or ask about your health, you might be able to make a claim and get the money you deserve.

Even people with perfect health records can often find annuities worth up to 10% more if they shop around.  If the provider didn’t talk to you about this and explain that you have the right to shop around, then you might be able to make a claim, too.

If you were married, in a civil partnership, or had people who relied on you for income, when you bought your annuity, and this wasn’t considered, it was possibly mis-sold.  This must be taken into consideration, and you should be allowed to nominate a person who will continue to receive the payments after you have died.

When talking with an annuity provider, you must also be made aware of any hidden charges before you agree to buy.  These extra costs can be a lot of money, and if they weren’t explained to you, to begin with, then you could have been mis-sold to.

Lastly, when you were sold the annuity, they should have asked you about how you wanted the payments.  If you wanted the payments to increase with inflation (variable-rate), or not (fixed-rate), and you weren’t asked about this, then you might have been mis-sold your annuity.

Checklist of reasons for mis-sold annuities:

• Not being asked about your health
• Not being told you can shop around
• Not being asked if you are married or have people who rely on you
• Not being informed about hidden costs and charges
• Not being asked if you wanted your payments to be fixed or variable

If any of these apply to you, or for any other reason you think your annuity was mis-sold, it is essential to contact a claims management company.  They will ensure that you can get back the money you might be owed.