When you come to draw benefits from your pension you will be presented with a document that explains what income your existing pensions provider will offer you, this is known as an annuity. The income will be based on your age and fund value as well as any other options you may require such as spouses benefits and inflation protection.
You will also be offered an “open market option” which gives you the right to shop around to see if other companies will offer a better income than your current provider. We can often secure an income of 20% higher using an open market option than using the annuity from the pension company. Issues such as your health, the health of your spouse, your family situation, your requirements for inflation proofing etc will all have an impact on the options you have and the income you could generate. You should also consider using a fixed term annuity which guarantees your income for a fixed term and helps retain valuable death benefits rather than losing them when you purchase the annuity.
People with over £100,000 should also consider Income Drawdown as an alternative to an annuity.
Fixed Term Annuities
As an alternative to securing an income for life you may want to consider using a Fixed term Annuity. This product allows you to convert your pension fund to a fixed income for a pre determined term rather than for life. The benefit of this route is you can defer the full conversion of the fund to an annuity for life which gives you the opportunity to maximise death benefits and retain control of your other options such as spouses benefits.
For example, if the person was about to retire with £100,000 as a pension fund after taking Tax Free Cash he could either secure an income for life or use a fixed term annuity. The income for life option means he has to decide if he wants inflation proofing, a pension for his wife on his death and depending on his health whether he qualifies for an enhanced annuity. All the above considerations will impact on his income and taking the income for life annuity gives no opportunity to change the decisions later. If he were to use the Fixed Term Annuity he could take a single life option without inflation proofing over a five year term. At the end of 5 years he has a guaranteed maturity value which offers the same options as above, i.e. annuity for life or fixed term. In those 5 years his personal situation may have changed, his health may have suffered or his wife may have died, either of which would make a big difference to the annuity decisions he would make at the time. In a worst case scenario he could have died, the fixed term annuity would offer a option for the spouse to continue to draw income which would be a great deal higher than the income protected by the annuity for life. By deferring the decision using a fixed term annuity the client has ensured he has all the options available to him for as long as possible.
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When you retire, or continue to work but decide to begin drawing your pension, you have the chance to purchase an annual pension called an annuity. Call us today t
o find out more.