It takes many years of planning, saving and sacrifice to build up a significant pension – and, after all those years, you want to be sure you are making the most of it.
This guide is designed to provide you with the basic information you need to start thinking about.
Whilst the guide focusses on annuities, there are alternatives such as Unsecured Pension / Drawdown which are much more complex on which you should take advice. The guide cannot make any recommendations or decisions for you but, armed with the information it provides, you can start to ask questions and with our help make sure your retirement is as well-funded as possible.
It is important to make sure you opt for the right type of annuity for you for the long term as once you have purchased a specific type of annuity you cannot go back on this choice.
Rules have recently been changed by the Government to allow greater flexibility & options.
TAKING YOUR PENSION & RETIREMENT BENEFITS FROM APRIL 2015
Wondering how the new pension rules will affect you? Thanks to our providers, we have access to information for those considering a pension, or currently navigating their way through one. Why not download this guide from Aviva to get to grips with the pension changes coming up in April 2015?
Please note: This is provided for information only, and should not be seen or taken as advice. Clients should seek full independent advice as to their own personal & specific needs, and Rossmore is ideally placed to do this.
WHAT IS AN ANNUITY?
An annuity is a regular fixed income, which you buy with a lump sum. Its term may end at a fixed date in the future, when you die, or when another named person dies.
The most common reason for buying an annuity is retirement, when the lump sum that you have built up over the years through a company or private scheme is used to buy an annuity and thereby provide you with a lifetime income. However, they can be bought with a cash lump sum from any source by any investor who requires income.
WHAT ARE THE CURRENT RETIREMENT RULES?
It used to be compulsory to purchase an annuity at retirement. However, now you can take a ‘pension commencement lump sum’ of up to 25% of your pension fund at retirement and defer your annuity purchase, or you can draw an income direct from your fund instead.
Alternatively, you can combine annuity purchase, deferral and tax-free lump sums so that you retire in stages over several years. Not all these options are suitable for everyone and there are certain costs and risks associated with each – but they all deserve at least some consideration before you take the plunge.
WHAT TYPE OF ANNUITY SHOULD YOU BUY?
Within annuities there are number of different considerations you need to think about:
– SINGLE LIFE OR JOINT LIFE?
This will depend on whether you have a partner for whom you need to provide after your death. If you have a single life annuity, the income you receive will stop if you die before your partner. If they have no income provision of their own, this could leave them in a difficult situation that a joint life annuity would have helped to alleviate. However, as the joint life annuity will be based on your combined life expectancy, the income you receive from this option will be lower than that of a single life annuity.
– WOULD YOU LIKE PROTECTION FROM INFLATION?
Since December 2009, the Consumer Price Index inflation figures have been above the Government’s target rate of 2%, demonstrating the constant potential for rising inflation. However, even with inflation at a low rate, a fall of just 2% every year in your disposable income could have a substantial impact over the long term. Protecting your annuity against inflation will cost you more in the short term but may give you piece of mind in the long run.
– WOULD YOU LIKE A GUARANTEED PERIOD?
Having saved for years for a decent retirement fund and then bought an annuity, there is the unfortunate possibility that you will die early, whereupon the annuity will end and much of that fund will have come to nothing. This encourages some retirees to put off buying an annuity for as long as possible (see overleaf). An alternative, however, is to buy an annuity with a guarantee. This ensures that the income will be paid for a set period even if you die earlier, meaning your heirs will recieve some benefit.
– COULD YOU ACCEPT SOME INVESTMENT RISK?
Investment-linked annuities invest your money into stocks and shares on the basis that investment growth could offer the potential for higher income payments in the future, without the need for you to buy inflation protection (see “2” above). There are risks to this approach, however, as your investment might not grow – indeed it might actually fall. Then, even if the investment does grow, it may not grow in line with your expectations – so either your income will have to be cut or it will have to be maintained at the expense of the capital value of your investment. If that possibility concerns you at all, you should stick to conventional annuities.
– DO YOU WANT TO BUY FROM MORE THAN ONE ANNUITY PROVIDER?
Although the income from annuities is fixed, retirees still have to take a risk on the provider. As the near-collapse of Equitable Life demonstrated, no company is 100% safe. That said, changes in legislation following the problems at Equitable Life mean that annuity providers are now better capitalised, so investors have greater protection than before. However, as with any investment portfolio, you may feel more comfortable spreading your risk across a number of different providers, which could also make other choices easier. For example, you could inflation-proof just part of your income or put a proportion into a joint life annuity if you need to provide for a dependent.
– DO YOU QUALIFY FOR AN ‘ENHANCED’ ANNUITY?
If you are suffering from a life-shortening condition, such as heart disease or cancer, you can get an ‘enhanced’ or ‘impaired life’ annuity. Some life offices also provide these annuities for ‘lifestyle choices’, such as smoking. In general, the term ‘impaired life’ annuity is used where there is a reasonable expectation that the person will die within five years. An ‘enhanced’ annuity is for someone whose life expectancy is reduced, but perhaps not to such an extent.
WHAT TO DO NEXT?
There are other options aside from the above such as short-term annuities and lifetime cashflow products to name two. Whatever your thoughts on the direction you might take, to ensure you take account of the full range of available options click contact us and we can help guide you using our knowledge and experience so you make the right choices and maximise your retirement funds.
The value of investments can go down as well as up, so you could get back less than you invested. If you are unsure if an investment is right for you, please contact us for independent financial advice