What are your choices when you retire?
An Annuity is an arrangement by which a provider, usually an insurance company, pays you a regular income, normally for life, in exchange for a one-off lump sum premium in advance. If you have pension arrangements that are money purchase schemes you will have to use your fund to purchase an annuity when you retire. If you have other adequate sources of income you may choose to defer buying an annuity but under current Government legislation you are obliged to buy one by the age of 75.
In general you have the option to take up to 25% of your retirement fund as a tax-free cash lump sum. The rest of the fund is used to buy an annuity. It is important to shop around for the best provider at the time you retire.
The different types of annuity
- Level annuity - Your pension stays at the same level throughout your retirement. Inflation devalues the spending power over time.
- Increasing annuity - Your pension starts off at a lower level but agreed percentage increases each year provides some protection against inflation. You can protect against inflation by linking increases to the Retail Price Index (RPI).
- With-profits annuity - Your pension increases annually dependent on bonuses added by the provider. Bonuses may vary.
- Guaranteed annuity - Pensions usually stop on your death. If you die soon after retirement (usually within 5 years) a lump sum is paid to your beneficiaries.
- Joint annuity - This provides you and your partner a pension until the last survivor of the couple dies.
You will have to consider many factors when you retire not least the options that give you the best income or benefits in retirement. You may choose to defer buying an annuity, up to the age of 75, in favour of taking an income from your retirement fund, for example if annuity rates are unattractive. This is known as annuity deferral and income drawdown. You should be aware that you carry the risk that the fund may be insufficient to pay you an income for your lifetime. If you die before buying an annuity the value of your fund passes to your estate.
Points to Watch: Shop around to get the best value. You do not have to buy your annuity from the company that you have your pension plan with although they will be pleased to sell you one. It is an important decision so think about taking advice from an independent company that specialises in this field.
General
Personal
Stakeholder
Occupational or Company
AVCs
Annunities
State Pension Scheme
