Conventional Annuities
Conventional annuities are among the most common types of annuity and essentially provide a guaranteed income for the rest of your life. The income itself will not be supplied with an attached level of investment risk. This means regardless of what happens to things like stocks and shares, house prices, or other sectors, the income will still be paid to you. There is also no connection to mortality risks, meaning you will still get a payment no matter how long you live for.
A conventional annuity, once purchased, provides someone with a set level of income for the rest of their life. They offer a clear, simple and secure method of a retirement income. However, one of their initial and obvious drawbacks is that they are relatively inflexible, and cannot be reversed. Neither can they be transferred or turned into cash, meaning an annuity decision is an extremely important one.
Remember, due to what is known as the open market option, you are free to choose who supplies your conventional annuity, should this type of product be the option you decide to take. But the deal which is offered to you by your pension provider as you approach retirement age may not be the best one available. The difference in income from one annuity provider to the next could be as much as 25 per cent, so it can pay to shop around to get the best deal.
Someone’s general habits, including whether or not they smoke and their medical history, can all be taken into account by providers of annuities. Some will set their rates accordingly, and this means someone might be able to get a higher income through going for a different product to a standard conventional annuity.
When going for a conventional annuity, someone will need to choose how often they want to receive an income for each year they are retired. Many people choose monthly, as that is how they were paid when they were working, but people can normally choose to be paid every three months, monthly, or once a year.
You can also normally choose whether or not you get cash payments in advance or in arrears. For example, if someone decides they want their income to be paid monthly, and they buy an annuity on May 1, and get their payments on that very day, they are being paid in advance. If the payment were not to arrive until June 1, they are being paid in arrears.
You can also normally choose between an escalating annuity as opposed to a level one. An escalating annuity will see payments increase every year, with the pay off being the fact that the income will at first start lower than with a level annuity, which pays the same amount each year. This means a decision will have been made between what someone needs immediately after retiring, and what they might need five or 10 years down the line or more. Whatever variation someone goes for, a conventional annuity is normally the most straightforward and ’safe’ option, although independent financial advice can help someone choose what is right for them.
