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. It is normal for people who are retiring to convert a portion of their pension fund into a tax–free lump sum with the balance used to purchase an annuity or an alternative income plan.
What is an Annuity?
An annuity is a guaranteed lifetime income purchased with the capital accrued over the investment term within a pension plan. It is purchased at retirement to provide a guaranteed income for as long as you live. The amount of income the annuity provider offers you in exchange for your pension fund is called the ‘annuity rate’. Annuity rates can vary and there is no obligation on your part to purchase your annuity from the company that is managing your pension fund.
Annuity purchase is a complex area, which requires an important and informed decision making process by you. Therefore it would be sensible to take independent financial advice before taking any action. Please feel free to contact us for further information.
What different types are there?
The income you receive from an annuity will depend on:
- The capital accrued within your pension fund.
- Your age at retirement when you purchase your annuity.
- Your state of health and life expectancy.
- Your gender.
- The rate offered by the annuity provider when you come to purchase your annuity and the type of annuity you choose.
- The area you live in.
Who provides the best Annuities?
The income that can be provided from your pension fund will depend upon the annuity rates available at the time you purchase your annuity.
Annuity rates are determined by the providers and are dependent upon a number of different factors. The size of your pension fund and your age, at the time you purchase the annuity, are particularly important.
The most competitive annuity provider will change over time. It is quite normal for the most competitive providers to change from week to week.
Once you have purchased your annuity, any amendments made to the annuity rates will have no effect upon your income. Therefore if you are interested in purchasing an annuity it is wise to compare the terms available from different providers. This can prove to be a time consuming process but assistance is available from your independent financial adviser.
Do I have to buy an annuity from my existing Pension Provider?
Even if you have been making regular contributions into a pension plan with a single pension provider, you should still consider the amount of annuity your pension fund could buy from a different annuity provider and compare this to the rate being offered by your existing pension provider. This comparison should be made regardless of how successful the existing pension provider has been with the investment of your pension contributions during the period before your retirement.
Good investment performance within a pension plan before retirement, does not guarantee that any annuity rates offered by the same pension provider will be the most competitive in the market place.
Can I purchase my annuity from a different Insurance Company?
The majority of pension plans allow the value of the fund to be used to purchase an annuity from any UK authorised pension provider. Any existing pension funds built up within any number of pension plans can be consolidated into a single annuity with an annuity provider of your choice. This is known as an Open Market Option (OMO).
This allows you to obtain the most competitive annuity rate available at the time of your retirement. Your independent financial adviser can undertake the process of finding the most competitive annuity rate and provider most appropriate for your requirements..
Can my pension annuity increase each year?
It is possible for you to choose an annuity with an increasing annual rate. These increases are known as annuity escalation. 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 annuity income will reduce over the term of your retirement. It is possible to purchase an annuity that increases in line with the Retail Prices Index (RPI).
The increases to your pension annuity are normally applied annually on the anniversary of the date that you purchased your annuity from your annuity provider You must make the decision to include pension escalation at the time you purchase the annuity, as it cannot be added at a later date. The level of increase you elect to build into your annuity will affect the annuity rate and level of the income you receive.
What impact does my age have on the annuity?
A pension annuity is payable throughout the remainder of your life from the point at which you purchase it from the annuity provider. Therefore your life expectancy has a significant influence upon the rate achievable at the time you purchase your annuity. As an example a 60–year–old person would receive a lower annuity rate than a 70 year old with the same sized pension fund because the younger person has a longer life expectancy.
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, most people look for the annuity provider to provide some form of guarantee. This guarantee provides a minimum period during which the pension will be payable. This period starts from the commencement of your annuity payment. Typically 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 next of kin 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 purchase 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.
Can I provide a pension annuity for my partner?
This question could affect the annuity that is available to you and would really need to be considered when deciding upon the most suitable annuity for you. Your financial advisor will be able to fully explain the advantages and disadvantages associated with this option
Can I provide a Pension Annuity for my children?
This question could affect the pension annuity that is available to you and would really need to be considered when deciding upon the most suitable annuity for you. Your financial advisor will be able to fully explain the advantages and disadvantages associated with this option.
Once I have purchased my annuity will my Pension fund continue to grow?
By purchasing an annuity you are guaranteed a long–term income stream either at an escalating or set amount. Any pension fund used to buy such an annuity no longer belongs to you. Therefore not only would it not be returned after your death but should the investment markets rise sharply your income level would not be affected Of course the same is true if the investment markets fell after you had purchased an annuity, namely a fall in market values has no bearing on your income.