The rules for annuities have changed. This means more money in retirement for some but less for others. We show you what the new rules will mean for you, and what you can do to ensure that you get the best retirement package possible.

• What are the changes to the annuity rules?
• The most important thing you need to know about retirement annuities
• How to find the best retirement annuity

As you know…an annuity (also called a ‘retirement annuity’) is a sum of money that you are guaranteed to get every year until you die. They are usually provided by insurance companies. You buy them with the pot of money you have when you retire (or later if you wish). It’s like a reverse insurance policy…you pay a big lump sum upfront and you get an income every month until you die. That’s it.

Sounds simple but there are all sorts of complications and caveats with annuities that you need to know.

Not only that, but the rules are changing – and have already changed quite a bit. If you’re coming up to retirement (or wondering whether it’s worth putting money into a pension) you need to know what has changed in the wild, wonderful and glamorous world of annuities.

What are the changes to the retirement annuity rules?

Up until 6th April 2011, you had to use your pension pot to buy an annuity by your 75th birthday.  Now, though, the age limit is completely removed.

If you’ve got a lot of money in your pensions pot…

Under the new rules you don’t have to buy an annuity at all – if (and it’s a big if) you have a guaranteed income of at least £20,000 a year from a combination of the three sources below:

• The state pension (which comes to just over £5,000 a year)
• A final salary occupational pension
• An existing pension annuity income

If you can guarantee £20,000 a year from the above sources (income from property, savings or investments does not count towards meeting the £20,000 total). you can take control of your pension fund as a lump sum. That means you can vary your retirement income year by year according to your needs.

Of course, even if you are fortunate enough to have a £20,000-plus a year pension pot, you can still buy an annuity if you want. For some people it’s a good idea to have one with either all or most of their money, because it does guarantee them a specific income for the rest of their lives.

If you haven’t got much in your pension pot (that’s most people)…

You still have to get an annuity. Actually, most people have pension funds of less than £50,000 (which would only give you about £2,500 a year) so an annuity is likely to be your only option.

Although annuities offer you less financial freedom (you’re handing over your carefully nurtured pension pot for an income that can stop the day you die) they could well be the right option for you anyway – because they do guarantee you an income for the rest of your life. It’s a risk-free option and once you’ve decided on the right annuity (that’s the tricky bit!) you can get on with your life without thinking about it again.

Other annuity changes

There have been some other changes to annuities that we think are positive, such as:

• the fact that you can now defer taking your tax free lump sum until after age 75 (at the time you  get your annuity)
• the fact that annuities can now pay lump sum death benefits after your 75th birthday. However, the tax charge on lump sum death benefits is increasing from 35% to 55%, so that takes some of the shine off that improvement!

Gender equality rules

As annuities are a big gamble for insurance companies (they have to try and work out how long you will live, and therefore how much money they will pay out) they have actuaries to work out the probabilities of your lifespan for them.

As they have to pay more for people who live longer, they have tended to offer less money to younger, healthier and female applicants. This is because women tend to live longer than men, making them a bad bet for annuities providers!

However, the European Court recently ruled that the use of gender as a risk factor to calculate annuity rates is a breach of sex discrimination laws. This means that:

• men could see their retirement income fall by up to 4.73%
• women could see their income increase by as much as 7.77%.

This is good news (possibly) for women – but bad news for men, of course. Given that annuity companies have their eyes continuously on the bottom line, it is most likely that men will lose out while women will only gain a little… but maybe we’re just too cynical!

The most important thing you need to know about retirement annuities…

…is that you need to SHOP AROUND for the very best one before you choose your annuity, particularly with the recent changes that have happened, as explained above.

We don’t wish to panic you, but this is one of those once-in-a-lifetime chances to get it right. Once you have chosen your annuity, that’s it for the rest of your life. That’s what you’ll get. So it’s really important to:

• take your time over it
• not be bamboozled into taking whatever your pension company wants you to take
• look around the whole of the market to find the best retirement annuity for you
• get good advice about the types of annuities available and which companies do the best versions of them

How to find the best retirement annuity

This is such an important subject that we have a whole article on how to find the best annuity for you, including where to go to compare annuity providers.

Your pension provider will try to get you to accept the annuity they offer – and it’s possible that it is the best, though that’s unlikely. You can often negotiate a better deal from them if you don’t accept their first offer.

The best thing, though, is to look around all the annuity providers and see what they offer. Also, consider whether you want:

• an annuity that is at a ‘fixed rate’ (the downside of these is that if inflation goes up a lot, you will still have the same amount of money coming in – so it will buy less for you)
• an annuity that is ‘index-linked’ – in other words it tracks inflation (the downside here is that these tend to start off very low and take a long time to creep up, and they tend to lag behind inflation too)
• an annuity that will pass on some of the money left in your pot when you die to your family
• an annuity that will pay your partner an income if you die
• an investment annuity (this could go up over the years or it could do badly, depending on what it is invested in).
• a ‘flexible annuity’ – a new product which is gaining ground in the UK, involving a kind of halfway house between a fixed annuity and flexible income drawdown (allowing you to vary your retirement income year by year to a certain extent).

These are just some of the questions you have to ask yourself, but they are covered in our annuities article.

There are likely to be more changes to the rules governing annuities in the next few years to make them more attractive to savers. Currently many people have been put off investing in a pension because they were told they had to buy an annuity with the money, and that if they died that money would simply go back to the annuity provider.

Now that these rules have changed (at least in part) it should encourage savers to put some of their money into a pension to look after their futures.