Annuities

Annuity Retirement Options

If your income requirement is temporary, then it maybe possible to meet your needs from the Pension Cash Lump Sum (PCLS) rather than taxable income or a combination of lumpsum and maximum drawdown pension to minimise the need to crystallise the whole fund.  It is the role of our advisers to ensure you draw your income in the most tax efficient manner.

What is a pension annuity?

A penson annuity is an income provided in return for your pension fund and is usually the remaining fund after tax free cash has been taken.

Pension annuities are taxed in full as earned income.

The level of pension income you receive will depend upon: 
• Age
• Sex
• Post code
• Annuity rate
• Size of fund
• The retirement options that you make

There are different types of pension annuities and a number of different options that you need to consider before deciding on the type that is right for you.

Buying an annuity

You may not realise it but buying an annuity is not always necessary and if you do buy an annuity, you will have it for life.  It is important to make the right choices, for example, annuity rates change in line with interest rates, so rather than buy at a time when interest rates are low, you may decide not to invest your whole retirement fund immediately and hold onto some instead.

Also, when you buy an annuity it consolidates the value of your investment i.e. there is no possibility of benefiting from future growth. In addition, unless you write in certain guarantees, you will not be able to pass any of that value to your heirs. If you die earlier than expected, the full purchase of an annuity will mean that much of the fund will be lost.

Is buying an annuity the best retirement option for you?

Read on for a more detailed discussion of the process of buying an annuity or consider these alternatives:

• Income drawdown
• Phased retirement

How to buy an annuity

It can be tempting to simply take the highest annuity rate you can find but you should also consider the long-term security of the annuity provider and the safeguards included to guard against inflation. Life expectancy in the UK today means your retirement could last 20 years or more.

We can assist and compare the entire market to help you select the annuity that is best for you.

Have you considered the open market annuity option?

 

You don’t need to buy your annuity from your pension provider.  At retirement your pension provider will write to you offering a range of annuity options, one of which will be an ‘open market option’. This is important as it allows you to take your retirement fund to a different provider than the one with whom you have actually built up your fund. It is now a legal requirement to ensure you are made aware of what your open market option will be.

What type of annuity should you buy?

 

Single life or joint life annuity?

 

This will depend on whether you have a partner you need to provide for after your death. If you have a single life annuity, the income you receive will stop if you die before your partner. If they have no income provision of their own, this could leave them in a difficult situation which a joint life annuity would help alleviate. However, as the joint life annuity will be based on your combined life expectancy, the income you receive from this option will be lower.

Would you like to protect your annuity income against inflation?

 

Since December 2009, the Consumer Price Index figures have been above the Government’s target rate of 2%, demonstrating that the potential for increased inflation still exists. However, even with inflation at a low rate, a fall of just 2% every year in your disposable income could have an important impact over the long term. Protecting your annuity against inflation will cost you more in the short-term, but may give you piece of mind in the long run.

Would you like a guarantee period?

 

Having saved for years for a decent retirement fund and then bought an annuity, there is the unfortunate possibility that you will die early, the annuity will then end and much of that fund will go to waste. This encourages some retirees to put off buying an annuity for as long as possible (see overleaf). The alternative, however, is to buy an annuity with a guarantee. This guarantees the income will be paid for a set period even if you die earlier, meaning your heirs will get some benefit.

Could you accept some investment risk?

 

Investment linked annuities invest your money into stocks and shares on the basis that investment growth could offer the potential for higher income payments in the future without the need for you to buy inflation protection (see b above). There are risks to this approach, however, as your investment might not grow – indeed it might actually fall. Then, even if the investment does grow, it may not grow in line with what you expect – so either your income will then have to be cut or will be maintained but start to eat into the capital value of your investment. If that possibility concerns you at all, you should stick to conventional annuities.

Do you want to buy from more than one annuity provider?

 

Although the income from annuities is guaranteed, retirees still have to take a risk on the provider. As the Equitable Life incident demonstrated, no company is 100% safe. That said, changes in legislation following the problems at Equitable Life mean that annuity providers are now better capitalised, so investors have greater protection than before. However, as with any investment portfolio, you may feel more comfortable spreading your risk across a number of different providers, which could also make other choices easier. For example, you could inflation-proof just part of your income or put just a small amount into a joint life annuity if you need to provide for a dependent.

Do you qualify for an ‘enhanced’ annuity?

 

 If you are suffering from a life-shortening condition, such as heart disease or cancer, you can get an ‘enhanced’ or ‘impaired life’ annuity. Some life offices also provide these annuities for ‘lifestyle choices’ like smoking. In general, the term ‘impaired life’ annuity is used where there is a reasonable expectation that the person will die within five years. An ‘enhanced’ annuity is for someone whose life expectancy is reduced but not perhaps to such an extent.

Further annuity options

 

There are other retirement options such as short term annuities and lifetime cash flow products. For example: the latter is designed to guarantee a certain percentage as an income each year for life but you retain control of the assets and have access to the remaining capital at any time.

Contact us today and our trained advisors can help you make the most of your pension and annuity options.

This is intended to provide information only and reflects our understanding of legislation at the time of writing. Before you make any decision we suggest you take professional financial advice Call 0141 764 0040.

Income Drawdown Annuities

Information on this website should not be considered as personal advice, if you wish to receive professional advice as to the suitability of an Annuity for you or would like to receive a personal annuity quote, please contact us. Contact us » for more information.