Before retirement beckons, a full analysis of your financial future should be undertaken. This review should assess two fundamentals; monetary income requirements and provision already made.
Retirement savings are derived via pension plans, whether it's personal or company pensions. In reality, pensions build a tax efficient pot of money, of which at retirement 25% can be taken as tax-free cash, with the remainder converting to income. This conversion tool is called a pension annuity.
Once an annuity is purchased it will determine income for life. The decision is final & cannot be reversed. Hence, its vital that the correct decision is made, with the best annuity found, providing the highest level of income. It's therefore essential you seek advice from an independent annuity specialist.
What is an annuity?
A purchased life annuity facilitates the conversion of pension savings into income, which is then payable for the rest of the annuitants life. The annuity doesn't necessarily have to be purchased from whom the pension savings were made. In fact, it's imperative that once the value of the pension fund is known your 'open-market option' is exercised. This effectively means you, or your annuity adviser researches the whole of the UK annuities market to find the best annuity rates.
Factors affecting annuity income
There are many variables which need to be considered before achieving the best annuity rates: -
Size of pension fund - the greater the amount saved up with the pension provider will convert to a bigger annuity payment. The early savings start the greater pension pot will be created.
Frequency of payment - deferring payments can result in a slightly increased pension annuity. The options of regular payments start from monthly to quarterly, six-monthly through to annual.
Level or with indexation - simply put, should payments remain the same, have a fixed increase or move in line with inflation? Indexed annuities start lower, but end up higher over time.
Single or joint life annuity? - if married, or have partner, you may wish to ensure your pension doesn't die with you. Joint life annuities will ensure payment even after the death of one party.
Your health - with evidence of poor health & with it reduced life expectancy, an enhanced annuity may offer a higher income. Following health questions, actuaries calculate revised annuity income.
Postcode lottery - actuaries assume living in the suburbs means a healthier diet & standard of living than someone in an area with high crime rates. Therefore, postcode affects annuity rates.
Hence, why it's important to get independent annuity advice & not take the first offer that comes along.
What types of pension annuity are there?
Essentially, there are three main annuity types; conventional, investment-linked and variable annuities. Lets look into each option to identify the differences: -
A conventional lifetime annuity is the most popular annuity as it offers a guaranteed income for life. They ensure security, but provides little in the way of flexibility. Income can be taken level or escalating, however this decision needs to be taken at inception & cannot be altered in the future. They are usually suitable for people with a risk-averse attitude, little investment knowledge & require security of income throughout their retirement. Around 85% of annuities taken are conventional.
If you require any information or quotes on pension annuities, the please call our annuity helpdesk which is available on 0800 678 5139.