The answer may be no annuity is right for you. But it’s always wise to cover fixed expenses with secure income. Contact Us to find out how recent changes may affect you.
Check out Talis Retirement Countdown
Annuities are one way of sourcing income from your pension. If you choose the annuity route the day you draw benefits you have to decide between the various options detailed below. Then that is the income you receive for the rest of your life; so getting it right is crucial.
The alternative is pension income drawdown. After the budget that looks increasingly attractive for those who can cope with the idea of a potentially fluctuating income and those who want to get their hands on as much as possible as quickly as possible.
Annuities are still likely to right for a good many and we are Kent based, impartial, independent, whole of market annuity advisers.
Nearly every pension offers an open market option. This means that if you have built up a pension fund with Company A; Company B might give you a better income. So using the open market option means you can move your fund from Company A to Company B and take the larger income for the rest of your life. Open Market Option Annuity
NB Some pensions offer guaranteed annuities – if they do it is unlikely to be wise to move your fund – see below for further details.
Income benefits from pension plans are taxable as earned income. Under current legislation there are four options to consider when withdrawing money from a pension fund:
Tax free cash: arguably the most desirable form of withdrawal as it triggers no tax on the proceeds and the pensioner controls how and when any income from the withdrawal is taken. The potential drawback to this option is lack of certainty in that while an annuity provides an income (in theory guaranteed for life) the amount of income achieved from capital will depend upon the investment vehicle chosen, and thus investment returns and/ or interest rates. In turn the real value of any income will depend on inflation.
Annuity: An exchange of capital for income between the pensioner and an annuity provider. Under current legislation pension funds must be used to purchase an annuity by the pensioner’s age 75. Income is available in a variety of profiles:
Single vs. joint life: A couple may elect that a pension is payable for the lifetime of the pensioner only, or for the longer of the lifetime of the pensioner or spouse.
Level vs. indexed: Elect for pension to be level from the outset or indexed in line with the RPI or some fixed amount such as 2 or 3% per annum.
No payment guarantee vs. payment guarantee: Payments of annuity will be for life but it is impossible to know one’s exact life expectancy at retirement. If no guarantee is selected the annuity dies with the annuitant, be it one month or 50 years after retirement; selecting a guarantee means that in the event of the annuitant’s relatively early death, income will be paid for at least the guaranteed period. The guaranteed period is typically 5 or 10 years.
Of the three pairs of options the options on the left: single, level and no guarantee all produce higher initial incomes from a given level of fund than their corresponding options on the right. Indeed when coupled with the taking of tax free cash selecting joint life indexed and guaranteed can halve the amount of initial pension.
In order to decide on the “best” annuity at retirement it is necessary to know your own date of death and that of your partner; together with the likely rate of inflation on your retirement date all in advance! As this is not possible one has to try and make an educated guess as to inflation and life expectancy.
Guaranteed annuities: Some companies offered guaranteed income rates for a given level of fund at outset. At the time these offers were made annuity rates had been stable for many years and the providers took the view that this was an attractive option for clients that would not cost them very much. Unfortunately, and most disastrously with Equitable Life, the annuity market changed radically and the guaranteed rates cost those life offices offering them a fortune, enough to close the company with the greatest exposure – Equitable. However many other companies also offered these rates and they are always worth considering.
Talis offers independent financial advice from the whole market. We are annuity experts, based in Ashford and Canterbury in Kent. Contact Us for further information or call us on 01233 722999.