Tag Archives: Purchase an Annuity

Alternative Annuity Options

In years gone by there was very little choice for those arriving at their retirement. Your choice would have been to take up to 25% of your pension fund as a tax free cash sum then use the balance to purchase a guaranteed income for the rest of your life in the form of an annuity or you could move into income drawdown. Typically someone with a lower investment risk profile would purchase an annuity as the income paid to them would not be dependent on investment performance, whilst someone wanting more flexibility and potential for investment growth may consider the income drawdown option.

By making a decision to purchase an annuity you are making a choice that will last for your lifetime. The options chosen when you purchase cannot be altered in the future should your circumstances change. An example of this could be that you purchase an annuity when you retire at the age of 65 and at that time you were fit and healthy and could only secure your annuity on standard terms. Five years later you find that your health deteriorates and you could have achieved a much higher annuity rate on enhanced terms.

There are temporary annuities available that can secure your income over the shorter term then guarantee a figure that will be payable after the fixed term therefore allowing you to review the annuity rates available, effectively delaying the final decision about the purchase of your annuity and possibly allow you to benefit from potentially higher annuity rates at a later date or to purchase an enhanced annuity if your health has deteriorated. It should be noted however that this option would carry the risk that once your plan reached its maturity date annuity rates may well be less than they are at the start therefore leaving you in the position where you could see a reduction in the level of your income.

Another alternative to the standard annuity would be a with profits annuity. These plans allow you to set your income level within certain parameters. They will generally guarantee a minimum income level and the balance of the income is dependent upon the profits declared by the annuity provider. If the income level is set at a relatively low level you should see growth in your income therefore giving you the potential for your income to keep pace with inflation. Usually part of the increase in your income will be guaranteed. The danger with this type of plan is to set the income level at the upper end of the scale because if the bonus rate required to achieve that level of income is not declared you could see your income reduce. Worthwhile considering if you have other sources of income in retirement and you can absorb the fluctuations that this type of annuity my present.

What Options can I choose on my Annuity?

On reaching the minimum age of 55 years of age you may start to consider your options for establishing an income to last throughout your retirement. Usually your pension provider will send you out a wake up pack as your planned retirement date approaches. This pack will usually include a basic quote for you to take an annuity with them.

It is very important to establish the best rate that could be available to you by using your Open Market Option.

The Open Market Option (OMO) is your right to take your pension fund to another provider to purchase an annuity or alternative retirement income. As the difference between the best and worst annuity rates can be considerable, it is worthwhile taking the time to find the best possible income for your given requirements.

If you have pension funds from a number of different pension schemes it is usually beneficial to take a view of the whole pot of savings as better annuity rates can sometimes be achieved for higher fund values.  Where a number of arrangements are to be used it is normal for the funds to all be transferred to the annuity provider to purchase the annuity under an Immediate Vesting Pension. This means that all funds are transferred over with the tax free cash being paid by the new provider, rather than the ceding scheme.

The rate applicable will be determined by the age, health and up to December 2012 your sex. From December 2012 to new EU Directive means that no differential in cost can be applied due to the applicant’s sex. Higher annuities are available for those that smoke and also health and lifestyle factors.

Other factors affecting the rate of your annuity will be the options that you choose such as escalating income, guarantees and spouse’s benefits. Generally speaking if you took a basic annuity with level income, no guarantee and no spouse’s benefit your income would be considerably higher than someone who chose to take an annuity increasing with RPI with a 10 year guarantee and 100% spouse’s benefit payable on death.

Annuity Rules Are The Biggest Misconception

An annuity is an important tool in the retirement sector, which allows you to draw your pension fund as regular income during retirement. Investing your hard earned life savings into an annuity is a very important decision indeed, and it is vital to shop around not only for the most suitable annuity type, but also for the most suitable annuity provider for you.

The biggest misconception when it comes to annuities is that one is required to set up an annuity with their pension provider. The truth is that thanks to the open market option, there is absolutely no need to be limited to your pension provider for an annuity. In fact, the Government is trying to encourage people to use the open market option and shop around for the best annuity deal before investing.

Annuity rates can vary very widely between providers. Also, the variety of annuity products available means that different annuities will have different rates even from a single provider. So a company that offers the best rates with one type of annuity may not necessarily do so with a different type of annuity.

The first step towards finding the right annuity, therefore, is to understand your own needs and find out what type of annuity works best for you. For instance, would you need a single life annuity, or a joint annuity? Would you rather have a guaranteed income for life, or invest in a higher risk investment linked annuity? Would you need a fixed annuity with fixed payments for life, or an escalating annuity? These are some of the questions that need to be answered before you can shop around for the best annuity quote.

Your pension provider is bound to offer a quote, and there is no reason why you should not consider this quote, as there is every possibility that it will not only be competitive but may even be better than the open market options. The point is not to limit your options, but to shop around and make an informed choice about this important step in life.

The Financial Services Authority has worked hard to ensure that pensioners have the right to exercise an open market option and shop around for annuity quotes. The FSA continues to encourage people to use this option and has also made it mandatory for your pension provider to remind you of this option while offering a quote. That you must purchase an annuity from your pension provider is a myth, but thankfully, one that is continuing to diminish rapidly.