Understanding annuity

What it an annuity?

 An annuity is a policy that you buy using money from your Personal Retirement Account (PRA). It then guarantees you an income for the rest of your life. Or for a set period of time if it’s fixed term.

 How much can you get from an annuity?

 The income you can get with an annuity, depends on:

  • your age
  • the size of your PRA
  • the type of annuity you go for
  • the annuity rates at the time of purchase

 What types of annuity are there?

There are many different types of annuity available. And they offer different levels of income, and different support for your dependents if you die.

Many will cover you for life, but some are for a fixed term and so only cover you for a certain number of years.  

As a starting point, you choose either:

  • Single annuity – this gives you an income, either for life or a fixed number of years. But the payments will stop if you die and there will be no support for your dependents
  • Joint annuity – this gives you an income for life, or a fixed number of years. If you die this will transfer to your spouse or other beneficiary and will continue to pay them a regular income until they die. It can also be used to pay a regular income to a dependent child, up to the age of 23  

 Then, you can opt for either:

  • Fixed income – this gives you exactly the same payments year in and year out. It is sometimes known as a level annuity
  • Increasing income – this increases your income year on year. The increase can be for an agreed amount, e.g. 5% rise per year, or in line with inflation. It is sometimes known as an escalating annuity
  • You also decide if you want to add any extras, such as:
  • A guarantee payment – this means that if you die within the dates of your annuity, it will still pay out within a certain period. For example if you have a 20 year annuity, but die after 15 years, the policy will still pay out an income or lump sum to your spouse for another 5 years.

Other variations are also available and you can find out more in our Read As You Need guide here

What are the main advantages of an annuity?

Depending on what type you choose, an annuity could give you:

  • A guaranteed income for life, or a set period of time
  • Income for your spouse or dependents, even if you die  

You can also choose to take 25% of your pension pot as a tax free lump sum before transferring the rest to the annuity.

What are the risks with an annuity?

  • You need to buy an annuity using money from your PRA, so this reduces your pot initially
  • The income you receive can depend on which provider you use and what type of annuity you opt for
  • Once you’ve purchased an annuity, it’s very difficult to change your mind, or to adjust your choices, even if your circumstances change
  • Providers often charge an administration fee or other management fees for providing an annuity
  • If you choose a fixed income annuity, you may find your money doesn’t go as far once inflation rates rise
  • If you choose a fixed term annuity, this could run out before you die
  • The terms offered by your annuity provider could appear to lose their value over time
  • Scams. Whenever you take money from your Personal Retirement Account (PRA) to invest somewhere else, like an annuity, you should be aware of the risk of scams and proceed with caution. You can find out more here

Is an annuity right for you?

You can use the retirement modeller in your myRPS account, to get illustrations showing

  • Single annuity
  • Joint annuity
  • Fixed income
  • Increasing income
  • Guarantee payments

This could give you an idea of which annuity might work best for you.

You may also wish to speak to an Independent Financial Adviser (IFA) before making any final decisions.

Liverpool Victoria (LV) has been chosen as the official partner to give RPS members access to financial advice. LV can be contacted on 0800 023 4187.  

You are still free to choose your own Independent Financial Adviser (IFA). You can find an IFA in your area at unbiased.co.uk

How do you get an annuity?

The Railways Pension Scheme (RPS) does not offer an annuity directly.

So if you’re considering this option, you will need to transfer money from your Personal Retirement Account (PRA) and use it to purchase an annuity from another provider.

In that case it’s important to shop around to find the best option for your needs.  This is because the income and additional features you receive, and the fees you need to pay, can vary widely from provider to provider.  There may also be different qualifying criteria in place. 

The Money Advice Service offers a comparison tool to help find the right provider for you. You can use that for free here, or you can speak to a financial adviser or annuity bureau to get them to search the marketplace for you

Are there alternatives to an annuity?

If you feel an annuity isn’t right for you, then you can consider:

  • getting a flexible income you can take a bit at a time. This is known as drawdown 
  • taking all of the money in your PRA as a cash lump sum.  We call this total encashment

You can find out more by clicking here