What is a Pension Annuity?
To be certain your pension fund will continue to provide you an income for as long as you live, you can use the rest of your pension pot after receiving your tax free cash to buy an income. This is called an annuity. You will receive a taxable income for the rest of your life. When you die the income usually stops, although you can choose for it to carry on to your dependants or anyone you choose to nominate.
You’re paid an income from an annuity for as long as you live so the amount you get depends not only on the size of your pension pot – but also on other factors, such as your age and your health. It’s therefore important to inform your annuity provider of all health and lifestyle factors – such as high blood pressure, diabetes, or if you smoke – as this could make a big difference to the annuity income you are offered.
There are also different types of annuity (often referred to as ‘shapes’) such as:
- Level – You’re paid the same amount every year.
- Inflation Linked or Escalating – Your income will rise in line with inflation or a pre-determined percentage.
- Joint Life – You can choose for someone to receive an income after you die.
- Enhanced – You may be eligible for an enhanced annuity if you smoke, are overweight or suffer from an illness. Enhancements can apply to a level, escalating or joint life annuity.
Adding annuity options such as escalation, joint life benefits, guaranteed benefits and value protection will have the effect of reducing the initial income payable when compared to a single level annuity.
There are also a number of options that can be added, such as:
- Guarantee periods – where the annuity income is guaranteed to be paid for a fixed term in the event of death.
- Value protection – where you can choose to protect a percentage of your pension fund up to 100%. The lump sum payable when you die is the percentage of your pension fund that is protected, less the total gross income already paid to you as annuity income.
Who should consider a pension annuity?
Conventional lifetime annuities tend to be suitable for people who don’t want to, or aren’t in a position to, take on further investment risk. Selecting a conventional annuity guarantees payment of the retirement income for the life of the contract. It must be remembered that an annuity is normally a ‘one-way street’ and once established, it cannot be altered to take account of your changing circumstances or requirements. However, consultations are underway to see whether a market can be created to trade annuities which would allow somebody to cash in their annuity. Clearly, this is likely to incur some costs and creating good value for an annuity seller will be challenging.
If a conventional annuity is the best solution for your retirement income, we will:
- Identify the right annuity shape to meet your needs
- Establish if you qualify for an enhanced annuity
- Secure you the best income in the market
- Arrange your tax free cash payment
- Set up your regular annuity payments
We can help you to select the correct retirement income solution
As we’re all living longer, choosing the right retirement income solution for your needs has never been so important. Finding the right solution for you will depend on an understanding of your personal circumstances and objectives and how the variety of available retirement income solutions can be used to meet your needs.
When selecting your retirement income solution, it’s important to shop around for the best deal. You are not obliged to stay with your existing pension provider and many retirees find better deals, and more money in their pocket, by searching elsewhere.
We strongly encourage you to try our ‘Annuity or Not’ tool on our website. This will give you an indication of the best retirement income solution for your circumstances and help you better understand the factors at play.
Most people wait until they stop work to take pension benefits but you can access your pension fund at any time from age 55 (rising to 57 in 2028). You don’t have to take the money when you stop working. You can leave it invested if you have other income – perhaps because you will still be working part time.
Contact us today for a retirement review and plan.