Annuities
Historically, when you decided to draw your pension you would take any tax free cash and the balance provided income via an annuity from an insurance company. Nowadays, there is no longer a compulsion to buy an annuity but it is vital that you consider all options and seek advice as to the right route for you. Regrettably many people continue to accept the annuity option offered by their pension provider which will usually be uncompetitive.
An annuity gives you an income for the rest of your life in return for your pension and when you die the payments stop unless provision for dependents is included.
A variety of factors will have an impact on the annuity rate a pensioner receives at retirement age including their age and the current level of interest rates and Gilt yields. Women now receive the same annuity rates as men.
Annuity Choices
There are various choices you can make in selecting an annuity.
Choice Of Provider – There is a competitive annuity market and we can help identify those companies with the best rates.
Pension Guarantees - A guarantee ensures that the pension will be paid for a minimum number of years irrespective of whether you live or not and is inexpensive. For example, a five year guarantee would means that five years instalments will be payable whether or not the person lives for the five years.
Escalation Of Income - If income does not rise, the spending power will decrease and to combat this escalation may be included. The annuity will then increase at a set rate each year and typically rates of 3% per annum, 5% per annum and inflation linked are offered.
The inclusion of an escalating income will reduce the initial level of income available. The decision as to whether to include indexation will be affected by a number of factors including your age, health, dependent needs, the availability of other income sources and overall assets.
Spouse’s Benefits - Many partners may be dependent upon the income provided by their spouse's annuity and could suffer if the annuity holder were to die. A spouse or dependent benefit may be purchased to ensure that in the event of the death of the annuitant, their loved one may continue to draw a pension. This will reduce the initial annuity available considerably.
Investment Linked Annuity - The basic features continue but the level of annuity paid is linked to the linked to the performance of one or more of the provider’s pension funds. The initial level of pension may be lower, but may increase if the investments grow although investments can go down as well as up in which case the income could fall. This approach provides an income that will reflect stock market returns; unit-linked and With Profits versions are available.
Impaired life/Enhanced Annuity -Annuities offer poor value to those who die early as they subsidise those who live on. Impaired life annuities redress the balance and a client who is in poor health or who have lifestyle issues that affect their longevity may receive a higher income.
Pros And Cons Of Annuities
Advantages Of Annuities
Security And Simplicity - Many people find the simplicity of an annuity appealing as they want a guaranteed income for life and the annuity offers this security. An annuity will be the preferred method of drawing pension income for the majority of people at some stage in retirement but some clients will wish to consider alternative options such as Drawdown especially early in retirement.
Disadvantages Of Annuities
Timing – Annuity rates have fallen drastically since the 1980s. However, it could be argued that annuity rates merely reflect current low interest rate, low inflation market conditions..
Tax Planning – Annuity income is liable to Income Tax and this means that those with substantial other sources of income may lose 45% in tax. There is little scope for Income Tax planning and the alternatives to annuity purchase can help in this area.
Single Retirement Date - A conventional annuity allows any tax free cash to be taken and simultaneously all of the remaining fund is used to provide immediate income. This may suit some, but others may prefer to draw benefits in stages. Often, tax-free cash may be required prior to any income benefits and it may be appealing to phase in income later. Drawdown and Phased Retirement can deliver the required flexibility.
Income Inflexibility – Once selected a conventional annuity cannot be varied and payments may not change to accommodate varying income needs.. There is a risk in that expenditure may outstrip income in the long term when an annuity is selected.
Waste of capital on unused benefits –The guarantees used to provide dependent benefits or escalation can reduce an annuity to 50% of its full level and may never be used. Should the spouse die before the annuity purchaser, the widow’s pension will have been wasted whilst we may never live to benefit from an index linked inflation proofed annuity.
Poor death benefit – Should the policyholder die shortly after purchasing an annuity, the family will receive poor value for the pension fund. Purchase of an annuity represents the exchange of a tax-free fund for a taxable life income and methods of mitigation such as guarantee periods are not wholly satisfactory.
No investment control or participation in future investment growth – Once a conventional annuity has been purchased the client has no stake in the future investment performance of the fund. Although all investment risk is borne by the annuity provider, all future profits are also owned by the annuity company. Many who have invested in personal pensions have been happy to shoulder a proportion of the investment risk in exchange for the prospect of a greater share in the profits and would be happy to continue this arrangement in retirement.
One way ticket - It is possible to use Drawdown or Phased Retirement and then switch into an annuity. However, it is not possible to transfer out of a conventional annuity once selected.
We can help you make sense of your choices and for many years we have provided independent financial advice regarding annuities and Drawdown to clients in Brighton, Hove, Sussex, London, Reading and the South East. If you would like a 'no obligation' chat about the choices available to you please contact us.
An annuity gives you an income for the rest of your life in return for your pension and when you die the payments stop unless provision for dependents is included.
A variety of factors will have an impact on the annuity rate a pensioner receives at retirement age including their age and the current level of interest rates and Gilt yields. Women now receive the same annuity rates as men.
Annuity Choices
There are various choices you can make in selecting an annuity.
Choice Of Provider – There is a competitive annuity market and we can help identify those companies with the best rates.
Pension Guarantees - A guarantee ensures that the pension will be paid for a minimum number of years irrespective of whether you live or not and is inexpensive. For example, a five year guarantee would means that five years instalments will be payable whether or not the person lives for the five years.
Escalation Of Income - If income does not rise, the spending power will decrease and to combat this escalation may be included. The annuity will then increase at a set rate each year and typically rates of 3% per annum, 5% per annum and inflation linked are offered.
The inclusion of an escalating income will reduce the initial level of income available. The decision as to whether to include indexation will be affected by a number of factors including your age, health, dependent needs, the availability of other income sources and overall assets.
Spouse’s Benefits - Many partners may be dependent upon the income provided by their spouse's annuity and could suffer if the annuity holder were to die. A spouse or dependent benefit may be purchased to ensure that in the event of the death of the annuitant, their loved one may continue to draw a pension. This will reduce the initial annuity available considerably.
Investment Linked Annuity - The basic features continue but the level of annuity paid is linked to the linked to the performance of one or more of the provider’s pension funds. The initial level of pension may be lower, but may increase if the investments grow although investments can go down as well as up in which case the income could fall. This approach provides an income that will reflect stock market returns; unit-linked and With Profits versions are available.
Impaired life/Enhanced Annuity -Annuities offer poor value to those who die early as they subsidise those who live on. Impaired life annuities redress the balance and a client who is in poor health or who have lifestyle issues that affect their longevity may receive a higher income.
Pros And Cons Of Annuities
Advantages Of Annuities
Security And Simplicity - Many people find the simplicity of an annuity appealing as they want a guaranteed income for life and the annuity offers this security. An annuity will be the preferred method of drawing pension income for the majority of people at some stage in retirement but some clients will wish to consider alternative options such as Drawdown especially early in retirement.
Disadvantages Of Annuities
Timing – Annuity rates have fallen drastically since the 1980s. However, it could be argued that annuity rates merely reflect current low interest rate, low inflation market conditions..
Tax Planning – Annuity income is liable to Income Tax and this means that those with substantial other sources of income may lose 45% in tax. There is little scope for Income Tax planning and the alternatives to annuity purchase can help in this area.
Single Retirement Date - A conventional annuity allows any tax free cash to be taken and simultaneously all of the remaining fund is used to provide immediate income. This may suit some, but others may prefer to draw benefits in stages. Often, tax-free cash may be required prior to any income benefits and it may be appealing to phase in income later. Drawdown and Phased Retirement can deliver the required flexibility.
Income Inflexibility – Once selected a conventional annuity cannot be varied and payments may not change to accommodate varying income needs.. There is a risk in that expenditure may outstrip income in the long term when an annuity is selected.
Waste of capital on unused benefits –The guarantees used to provide dependent benefits or escalation can reduce an annuity to 50% of its full level and may never be used. Should the spouse die before the annuity purchaser, the widow’s pension will have been wasted whilst we may never live to benefit from an index linked inflation proofed annuity.
Poor death benefit – Should the policyholder die shortly after purchasing an annuity, the family will receive poor value for the pension fund. Purchase of an annuity represents the exchange of a tax-free fund for a taxable life income and methods of mitigation such as guarantee periods are not wholly satisfactory.
No investment control or participation in future investment growth – Once a conventional annuity has been purchased the client has no stake in the future investment performance of the fund. Although all investment risk is borne by the annuity provider, all future profits are also owned by the annuity company. Many who have invested in personal pensions have been happy to shoulder a proportion of the investment risk in exchange for the prospect of a greater share in the profits and would be happy to continue this arrangement in retirement.
One way ticket - It is possible to use Drawdown or Phased Retirement and then switch into an annuity. However, it is not possible to transfer out of a conventional annuity once selected.
We can help you make sense of your choices and for many years we have provided independent financial advice regarding annuities and Drawdown to clients in Brighton, Hove, Sussex, London, Reading and the South East. If you would like a 'no obligation' chat about the choices available to you please contact us.