While the pension changes brought into force in April 2015 give a lot more flexibility around how people take their pension income, many will still purchase an annuity. And, if you shop around for one thing in your life, shop around for the best annuity rate! It may not be possible to change annuity providers later, so it's really important to make a fully considered choice to ensure that you enjoy the best income possible in your old age.
When you are approaching the point of retirement, your pension provider will normally give you an annuity quotation. However, you have the legal right to shop around (called the open market option).
Make sure you do – as with most financial products, you will often find you can get a much better deal by comparing what is on offer. Your pension provider will send you a letter with the value of your fund prior to your retirement date – you should use this figure to compare annuity rates.
However, don't discount what your existing provider offers, as some pensions, particularly older ones, offer a Guaranteed Annuity Rate (GAR). A GAR may be quite a bit higher than those available on the open market, particularly given that the average annuity income has dropped substantially over the last few years.
The younger you purchase your annuity, the less of an income you will get as the provider will assume that they will have to pay you an income for a longer period.
Although you can purchase an annuity from the age of 55, there is no requirement for you to actually retire when you start to receive your annuity income. And when you purchase your annuity is up to you – the older you are, the greater the annual income you are likely to receive.
When you purchase an annuity the income will be paid for as long as you live (single life). You can also set up the income to be paid for as long as both you and your partner live (joint life).
It is worth noting that while a joint annuity will usually pay less than a single annuity (as with a younger age, the provider will expect to be paying a joint annuity for longer), your spouse/partner will not lose the income from the annuity in the event that they outlive you.
There is also a third option: to have a joint annuity where the income continues to be paid a reduced rate after the first death. This can strike a balance between making sure you or your partner still has some income, but also giving a slightly higher annuity rate in comparison to a standard joint annuity.
When you die, any unused pension pot you used to buy your annuity will usually pass to the annuity with provider – not your loved ones. That is, unless you have opted for a guarantee period or something called 'value protection'.
A guarantee period is a minimum term over which the annuity will be paid, even if you die during this time (typically the first five or 10 years).
Once the initial guarantee period ends you will continue to receive your annuity, although your dependents will not continue to receive it if you pass away after this point.
If you choose Value Protection, your family will be able to inherit your unused pension pot. This will be subject to tax if you die after your 75th birthday.
When you purchase your annuity, you are able to take a portion of your pension pot (up to 25%) as a tax-free lump sum. Bear in mind, however, that any cash you take from your pension will reduce the amount you have left to buy an annuity with. This would mean a lower income in retirement. However, you can always take an additional income by using your tax-free cash wisely.
If you're undecided you could opt to have part of your annuity level and part increasing.
If you are in any doubt over whether to withdraw some of this cash, you should seek professional advice.
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Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.
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