Upon reaching your intended retirement age an important decision must be made with the pension fund that you’ve been accumulating throughout your working life.
One of the options available is to secure an income by way of an annuity. An annuity is a contract with an insurer whereby in exchange for a lump sum they gaurantee to pay you an income for the rest of your life. In general the larger your pension fund, the greater income you will receive.
However, the income you receive isn’t determined by the size of your pension fund alone. Your age, sex and health play important roles. Similarly, the options you choose with regards to the annuity itself also may also affect the actual amount of income you receive. Our approach ensures the correct level of advice is given to enable you to maximise the income you receive from your pension fund while also having a plan that fits yours and your family’s needs.
Open market option.
A key objective in planning for retirement is maximising the income you will receive to make life after work as enjoyable and rewarding as possible. A fundamental aspect of this may be utilising the open market option with your pension fund.
On reaching the selected retirement age of either an occupational money purchase or personal pension the provider will invariably offer an annuity illustration. The illustration will show the maximum income that the provider can pay given the size of your pension fund, for the rest of your life.
However, the provider’s annuity may not be as competitive as what can be found elsewhere and by using the open market option you could make a considerable difference to the income you receive.
For example, many providers do not offer increased rates for ill-health, smoking or may not differentiate by sex. This may increase your annual income by up to 40%. It may also be the case that your scheme provider’s selected annuity is just not as competitive as like-for-like annuities on the open market.
Our approach ensures that you are safe in the knowledge that you can achieve the maximum income possible from your pension.
What happens if I die?
If you were to die after purchasing your annuity your next of kin will be entitled to no lump sum benefit, however there are two methods you can use to protect yourself and provide for your family or dependents in such an event.
Guarantee Periods.
A guarantee period can usually be for five or ten years. The guarantee period will protect your remaining retirement income if you die within this period. If you protect your income for five years and die within two, your insurer will pay the remaining three year’s income to your chosen beneficiary. If however you died after the guarantee period your income would be retained by your insurer. It would be unnecessary to select this option if you have a joint annuity as your partner will already receive a proportion of your annuity after your death.
Annuity protection lump-sum death benefit.
You may also chose to opt for an annuity protection lump-sum death benefit. You may also hear it referred to as ‘value protected’ or ‘money back’ annuities. Should you die a lump sum equivalent to your original pension fund minus the income you have already received will be paid to your beneficiaries or estate. There will however be tax charges.
For example, in the instance of an annuity of £100,000 paying an annual benefit of £6,500 a year - If after 7 years you died, the death benefit will pay the difference between the initial purchase price and the payments you have already received to your estate.
Do I have to buy an annuity?
You don’t have to buy an annuity unless you have contracted out your State Second Pension, in which case you will have to opt for a protected rights annuity for that proportion of your pension fund. Otherwise you are free to determine what type of annuity you opt for, or if you have one at all. If you decide against an annuity, your alternative is an unsecured retirement income, also known an income drawdown. With income drawdown, you take an income from a proportion of your fund, the remainder of which stays invested. Find out more about Income Drawdown here.
Can I change providers?
Exercising the open market option enables you to search the market for the best possible annuity; you have the choice as to whether you stay with your current provider. Your pension provider often won’t be the insurer offering the best rate. By searching the open market you can ensure you have the highest income available to you. There could be as much as 40% difference between providers.
Once an annuity has been purchased it can not be changed, the decision to purchase an annuity is an extremely important one that will effect your financial circumstances for the rest of your life. If you would like to speak to an adviser regarding retirement planning please click here.
