Having successfully built up a pension fund during your working life there will come a time when you will need to make some important decisions about how to use this fund. These decisions involve how you intend to draw your pension income to ensure the benefits best suit your needs in retirement. An annuity put simply is an arrangement whereby you buy an income from the pension funds that you have built up. The insurance company will provide an income for life in exchange for the money in your pension funds.
To learn more about your choices you can read the information below, or complete an annuities “planner”, which will guide you through a list of options, by clicking here.
Many people mistakenly believe that they have to buy an annuity from the company to which they have been paying their pension contributions. This is not the case as you are able to shop around to find the insurance company which is prepared to offer the most competitive annuity rate. By doing this you will ensure your hard earned pension fund produces the highest income possible. This is commonly known as an Open Market Option. Additionally, if you suffer from ill health or existing conditions you may be able to get better rates by taking a different type of annuity – click here to see more. The income you will receive varies depending on the number of options that you take and will depend on a number of factors such as-
- The amount you have in your pension fund
- Your age at the time you buy your annuity
- Your state of health and life expectancy
- Your gender women live longer than men and get lower annuity rates
- The rate offered by the insurance company when you come to purchase your annuity from them; and the type of options within any annuity you choose.
The income that you receive from your annuity is classed as earned income and is subject to tax at your highest marginal rate. Once you have purchased an annuity these are paid for life. Any taxation and benefits are subject to your own personal circumstances are subject to change.
What should I do now?
When purchasing an annuity there are a number of different annuity options available for your needs. It is essential to ensure that the choices you make are suited to your current and future circumstances as the decision you make can rarely be reversed or changed in the future. The majority of pension plans allow you to transfer the pension fund to another UK authorised annuity provider. This is called an Open Market Option. An Open Market Option (OMO) allows those with accumulated pension savings to choose the provider from which they buy their annuity. By using the OMO and shopping around you can obtain the most competitive annuity available at the time of your retirement. Deciding if an annuity is right for you can be a difficult decision for someone to make. This process can be made even more confusing when taking into account all the different types of annuities available on the market. By searching the whole of the market you can be assured you are receiving the best rates available for your pension income. If you have specialised retirement needs or you simply prefer to speak to a fully qualified Independent financial adviser complete the form and we will arrange for an adviser to contact you.
Receive advice
Planning for your retirement whatever your circumstances is a big step and if you are coming up to retirement you may benefit from receiving professional financial advice to ensure that your retirement is as fulfilling as possible. There are a wide number of options available to you and by talking to an Independent Financial Adviser you will be able to discuss your main retirement goals and plan how to achieve them. We will provide access to a specialist adviser in your area who can arrange a meeting at a time that is convenient to you. If you have large pension funds specialised retirement needs or you simply prefer to speak to a fully qualified Independent financial adviser complete the form and we will arrange for an adviser to contact you.
More Information
Planning for your retirement is an important step. If you would like to learn more about your retirement options the Financial Services Authority have produced an informative booklet – “Just the facts about your retirement options to help you make the right decision.”
Annuities FAQs
What different types are there?
There are various benefits that can be attached to a conventional annuity each has its own features and benefits and these should be considered carefully. You can take out an annuity on a single life basis or a joint life basis. The main difference being that a single life basis pays out and ceases when you die whereas on a joint life basis it will continue to pay an income to your spouse or financial dependent. You decide what level of income they would receive on your death. A person purchasing a joint life annuity will generally receive a reduce income level compared to people who purchase an annuity on a single life basis. A level annuity will pay out a fixed annual income for the rest of your life. It will not increase in line with inflation or the cost of living. There are other types of annuities on the market and they are looked at in the frequently asked question: What other options are there other than conventional lifetime Annuities? Which type of annuity you choose will depend on your circumstances your attitude to taking risk with investments and your expectations for the future.
Can I take a lump sum from my pension fund? Under current legislation you may be able to take up to 25% of your pension fund as a tax free lump sum. By taking the tax free cash you will reduce your pension fund and subsequently the money available to purchase an annuity. However you do have lump sum to spend or invest as you wish.
What are Guaranteed Annuity Rates? A pension fund may have some form of Guaranteed Annuity Rate associated with it. This is a valuable benefit and one which should not be dismissed easily. A guaranteed annuity rate is a benefit which guarantees to provide a certain level of income that the provider is prepared to provide in return for your pension fund. There is no guarantee that this level of income will be more than you would have received if you utilised your open market option but this alternative should not be dismissed.
Can my pension annuity increase each year? It is possible for you to choose an annuity that will increase each year. There is not normally any requirement to have an escalating annuity however you should remember that without an increasing annuity the spending power of your pension will reduce over the term of your retirement. If you include an increasing option then your starting income will be reduced and it may take some time to increase to the level of a non increasing option. You can have an increase at a set rate of usually 3% or 5% and these rates will increase year on year for the rest of your life. Additionally you can elect for an increase that rises or falls in line with the changes to the Retail Prices Index RPI or Limited Prices Index LPI Any decision you take must be made at the time you purchase your conventional annuity. Once started the annuity can rarely if ever be altered.
What impact does my age or my sex have on the annuity? A pension annuity is payable throughout the remainder of your life from the time you first purchase it from the annuity provider. Therefore your life expectancy has a great influence on the starting level of your annuity. As an example a 60-year-old person would receive a lower annuity than a 70 year old with the same sized pension fund because the younger person has a longer life expectancy. It used to be the case that the effects of life expectancy were also reflected in the difference in an annuity payable to a woman compared to man of the same age with the same sized fund. However since December 2012 law changes by the European Court of Justice have meant that this is no longer the case.
What are Guarantee periods? Since a Pension Annuity ceases on your death unless you have chosen a joint life annuity and none of the purchase money is returned to your estate unless you take out value protection a guarantee provides a minimum period during which the pension will be payable. This period starts from the commencement of your annuity payments. Normally the guarantee period is five years although under some company pension schemes this period could be as long as ten years. Should you die during the guarantee period then your chosen benefactor will continue to receive the annuity payments until the end of the guarantee period. Alternatively the provider may pay a lump sum in lieu of future payments the method they use would be determined at outset of the annuity. You should ensure you are aware of the type of guarantee if any that you are buying when your annuity is purchased as it cannot be changed once the payments commence. This may reduce the level of initial income you receive but you must consider whether this is a worthwhile option.
Can I provide a Pension Annuity for my children?
You are allowed to provide a pension annuity that becomes payable after your death for one or more of your children either natural or adopted. There are certain provisions that need to be met for this to become a viable option. If you have a financially dependent child with special needs under certain circumstances the pension annuity may be payable to them throughout the remainder of their life.
What is Triviality? Under current pension rules if the combined money of ALL your pension funds is less than 1% of the lifetime allowance then it may be possible to take your pension as a lump sum rather than taking an income. To consider this option you must also be between 60 and 75 and convert all your pension funds within a 12 month period. Only a quarter of the fund can be taken tax free the remainder is taxed as earned income.
Impaired Life Annuities Enhanced The annuity rates that the providers use are primarily based on life expectancy. If you have suffered or are suffering from a serious illness such as heart problems blood pressure cancer sever asthma stroke etc annuity rates may be offered that are significantly higher than normal rates. This is due to the fact that certain medical conditions qualify for enhanced rates because the annuity provider perceives that there is a lower life expectancy for that person.
Taking Your Income Early You can take your pension benefits at age 55. However it may not be in your best interests as you are effectively taking your pension income early which reduces its value when purchasing an income. There are some important points to consider and some of these can be seen below.
- Releasing your pension benefits early could reduce your income at retirement and therefore is only suitable for a limited number of personal circumstances
- If you have a with-profit pension fund and take your retirement benefits early you may have a market valuation reduction early exit penalty applied to your fund
- If you have a unit linked pension fund and take your benefits early you may have early exit fees or charges applied to your fund
- You may lose other valuable benefits that are linked to your pension plan for example Guaranteed Annuity Rates
- If you take your pension benefits early you leave yourself less time to build up your retirement fund
- If you take your retirement benefits at a time when the stock market is performing poorly your pension fund value may be adversely affected
For those that require a little more flexibility or control over their retirement planning there are alternatives to taking a conventional annuity. These alternatives are generally considered for those with high value pension funds that would prefer some degree of flexibility to suit their retirement planning. You may have a reduced source of income but you must be prepared to accept a degree of risk that the value may reduce and the income may fall. There is no guarantee that the pension fund will increase in value and it may affect future income levels if the fund is reduced. Higher charges are usually associated with this course of action and it is important that you seek professional Independent Financial Advice from a fully qualified and experienced adviser.
- Phased Retirement uses part of your pension fund to buy an annuity and the remainder of the fund is invested. You can then use another portion of the pension fund to purchase an annuity at a later date which can provide you with a flexible income.
- Income Drawdown/Withdrawal You may take an income direct from your pension fund. This income is taxed as earned income. The remaining part of the fund is invested which could increase or decrease in value. This is a complex area of retirement planning and if it is something that you would like to look into specialist advice would be needed.
- Drawdown Pension – At the age of 75 an alternatively secured pension would allow an individual withdrawal of income similar to an unsecured pension fund such as income drawdown. This is a complex area of retirement planning and if it is something that you would like to look into specialist advice should be considered.
- Investment Linked Annuities put your pension fund into investment based products for example stocks and shares. This way there is a possibility that you could continue to benefit from any increase in the value of the investment however the opposite can also be true in that you could risk the value falling. There can be a choice of funds to choose from and these are generally investment funds with varying risks and with-profits funds that directly link to the performance of the companies with-profits funds.
- Temporary Annuities These are annuity products that give a person a degree of flexibility while still providing important guarantees to them. A temporary annuity is more flexible than a conventional annuity because it only locks someone into an agreement until their 75th Birthday. When a person reaches 75 they then have to purchase a conventional annuity or take up a drawdown pension option. With these products a person does not have to make a decision when they first purchase an annuity that they are tied to for the rest of their lives. At the end of these plans or if the person dies a guaranteed maturity amount is payable less any tax deductions.
However it is important to note that there is a cost involved for having these guarantees in place. There is also no guarantee that when a person turns 75 they will receive a better annuity rate than the one they could have received if they had purchased an annuity when they were younger. If you are considering alternatives to conventional annuities it is recommended that you seek expert independent financial advice
Currently the income from an annuity is treated as earned income. In most cases the annuity provider will normally deduct income tax before they pay you and pass this on to HMRC. If you buy an annuity with money from a company pension scheme its trustees may pay you income instead of the annuity provider in which case they will deduct the income tax.
What is value protection? Some annuity providers allow you to choose this option when you purchase an annuity. Value protection represents a return of original capital less annuity payments received in the event of the annuitant’s death before the age of 75. The proceeds are payable less 35% tax. If a person dies from age 75 onwards then it is not possible to pay out any Value Protection that they may have chosen.
The annuity we buy when we retire provides our income for life. Getting the best rate by checking the entire market is vital (known as the Open Market Option), rather than taking an annuity from the company you have your … Read More
