What is an Annuity?
Pensions and annuities are different. Pensions are where you save for retirement, when you start drawing the pension it is called an annuity.
An annuity pays a guaranteed income for life and is the most common way to convert a pension plan into an income. In practical terms it means handing over your pension fund to an insurance company, and in exchange they will pay you a guaranteed income for life.
Should I take the annuity on offer from my pension provider?
Pension providers rarely offer the highest pension income. In fact nine times out of ten we get our clients a much better pension income, simply by shopping around. This is particularly true if you have any health issues, smoke or are overweight as you are likely to quality for an enhanced annuity, which means that you will get a higher pension income.
In any case, an annuity may not be the best option for you – it may be that drawdown or lump sum might be more appropriate. We have the expertise, experience and knowledge needed to review your options and help you make the most of your pension savings.
There are various choices you have to make when selecting an annuity, such as whether you want a level pension or one which rises in line with inflation and whether you want to provide a pension for your wife or husband should you predecease them.
Do you want your pension to increase each year to keep pace with the cost of living?
With people living increasingly longer more people are choosing pensions which are index-linked, which means that the annuity rises each year to help ensure that your money has the same value in real terms. This is particularly popular for younger, healthier retirees aged 55-60. However, choosing an index linked pension means you will have a MUCH lower pension initially.
Do you want your pension to continue to your spouse or partner?
Many married couples and civil partners opt for joint life annuities, which mean that the pension will continue to the surviving spouse. Annuities can be either single life on just the pension holder or joint life, including their spouse or partner. You don’t need to be married, joint life annuities can pay non married partners too.
What does a 5 year guarantee mean and why would you want one?
Many people ask us about the guarantees. These are another death benefit option and most pension providers tend to quote a 5 year guarantee as standard. This means that your pension is guaranteed to pay out for the first 5 years, even if you die in the mean-time. For example John Wood’s was separated from his wife, so didn’t need to incorporate a spouses’ pension, but as he was in poor health, he was concerned that if anything happened all his pension money would be lost. His enhanced annuity started in July 2010 and incorporated a 5 year guarantee and he nominated his daughter, Sally Wood as the beneficiary of the guarantee. Sadly Mr Wood died in April 2013. His annuity will continue to be paid to Sally, until July 2015, five years after Mr Wood’s original annuity started.
You can opt for a 5 or 10 year guarantee and you can have a guarantee and a spouses’ pension, but most people choose one or the other. We can help advice you on which would be most appropriate for your circumstances.
If you’d like a lump sum at the outset or a higher ongoing pension, you can take as much as 25% of your pension fund as a tax free lump sum before you buy an annuity. Most people do it this way because the cash comes tax free
Most people choose monthly payments but you can also have your cash paid quarterly, every six months or annually. If your pension is tiny you might want to do things this way and use it for an annual treat rather than income.
How Aspect 8 can help
We will review your existing pensions and explain all the options to you so you can feel comfortable with your choices.