Not a lot of people know the difference between an annuity and a pension.
This is probably why pension advice is the most popular need for advice in the UK. A ‘pension’ is the generic term used to describe retirement income. It is also a type of investment plan used to save towards retirement. For that reason you can easily come across a pension when discussing both saving for retirement and then taking income in retirement.
For the purpose of this article I shall be referring to a pension as the investment plan you use to save towards retirement. Because once you get there, that is when you purchase an annuity.
An annuity is something you buy with the money you have built up inside your pension plan. Whether you have a Stakeholder Pension, Self Invested Personal Pension or normal Personal Pension, once you reach retirement age you will have the choice of buying an annuity with the money you have built up.
This is all too often, all too sadly a route taken by the majority of people in this situation. Most often people opt to take the annuity offered by the pension provider. The truth is that you could earn so much more by shopping around for the best annuity rates, just like any other investment or product in fact.
However, the choice of whether to buy an annuity with your pension provider or whether to buy one with another provider is far from the only choice. The fact is that annuity rates (the level of income paid in exchange for your pension lump sum) have fallen dramatically over the past few years as the chart below shows (the black line at the bottom).
That is why the option to even take an annuity should be seriously considered. There are many more options you can consider that could make a very big difference to the income you receive for the rest of your life. That is because once you take out a conventional annuity it can never be changed, ever.
For more information and help on choosing the right annuity please click on the link below.