Annuities
1 June 2007
Drawing an income in retirement. It’s payback time.
You’ve scrimped and saved all these years and now it’s time to retire. What do you do to get your hands on your hard earned savings? One answer could be an annuity.
What is an annuity?
An annuity is an investment product bought using your pension fund or other savings which guarantees you a regular income for life or for a fixed period of time.
So how much will you get? Basically, your income will depend on three key factors: the size of your fund, interest rates and your life expectancy.
So buying an annuity depends very much on your state of health and it’s worth shopping around as rates can vary quite dramatically between providers.
You do not have to buy your annuity from your current pension company. You could take what’s known as the ‘open market option’ and see what’s on offer from other pension providers.
What are the rules?
Unless you are part of a final salary pension scheme, you will use at least some of your pension fund to provide an income by age 75. Although there are exceptions made for some groups who object to buying annuities for religious reasons. Pension income after 75 can also be delivered via an Alternative Secured Pension (ASP), these arrangements are not suitable for everyone and for most people an annuity is likely to be a preferable option.
Types of annuity
Traditionally a fairly inflexible instrument, some companies now offer a wide choice of annuity options:
Basic annuity: a steady income for life which never changes
Phased annuity: deferred payments for those who do not need an income immediately
Index-linked annuity: to ensure your income keeps pace with inflation
Joint life annuity: where an on-going income is paid to your partner after you die
With-profits annuity: providing a level of income and the potential to have an income that grows subject to bonuses
Impaired Life or Ill-health annuity: although annuity rates have suffered in recent years they can make sense if you are in poor health when you retire. If your life expectancy is likely to be shorter your annuity payments will be correspondingly higher.
And remember, annuities offer financial security. With an annuity your income is guaranteed not to run out but as we have seen the risk is that choosing a level income means inflation will reduce it’s buying power.
Keep your options open
You do not have to buy your annuity immediately on retirement. If you do not want to buy an annuity immediately, you can draw an income directly from your pension fund – this is called income withdrawal or income drawdown. Generally income drawdown is only viable for those whose pension funds on retirement are in excess of £100,000.
On the plus side, your money stays invested so that your pension pot has the potential for growth. But, that of course entails some risk. So you must keep a watchful eye on how your investments are performing and how much you are withdrawing from your overall fund so that the money doesn’t run out and eventually you do have to take a level of pension income from the fund.
How to find out more
Annuities are a complex subject, and you really need to talk to your independent financial adviser (IFA).
You & your money provides general information and not advice. If you are seeking advice on financial matters you should contact a qualified financial adviser. If you do not have a financial adviser and would like to contact one visit www.nsandi.com
