What is an Annuity?
So, the big retirement date is approaching and it's time to decide what to do with all that capital accumulated in your pension fund. Upon reaching retirement you will need to consider turning the capital fund into a regular pension income. Remember you can take up to a quarter of the pension fund as a tax free cash sum, but everything else has to sooner or later be used to fund an income.
Anyone who has built up a lump of cash with a pension provider has to buy an annuity by the time they get to their 75th birthday. There are few exceptions to this. For example, people who are part of what is known as a workplace final salary scheme will not have to do this.
Annuity rates are largely determined by your age, sex and anticipated lifespan(don't worry, the Life companies use longevity tables to estimate this). Different styles of annuities offer different rates. Remember, due to what is known as the open market option, you are free to take an annuity from any provider you wish, and do not have to choose the one put up by your existing pension provider. Essentially you are free to shop around to get the best pension annuity deal.
There are several influences on the style of annuity best suited to you. Please see the Annuities section for more information. As retirement gets closer, your personal pension provider will get in touch with you and offer an annuity. You may of course choose to accept this offer, but the open market option means you can shop around to ensure a better deal. You also do not need to get an annuity straight away, and as previously stated you can wait until you're 75 if you wish. However, it is seldom practical, nor financially advantageous, to defer purchasing an annuity.
The open market with all its different types of annuity is a changing landscape, with values and prices altering almost daily. This means the differences between providers can often be quite stark and a wrong decision could see you losing out on signifiant additional income.
Remember this is essentially an irreversible decision which involves exchanging your pension fund for the regular income agreed with your annuity provider. Therefore it is important to choose what you think is best for you, and taking independent financial advice is also an important part of the process towards making a decision.
Broadly speaking, the different types of annuity available can be broken down into several different sub sections - conventional annuity, enhanced annuity, flexible annuity, impaired annuity, unit linked annuity and with profit annuity. This range of terms might seem quite complicated and intimidating at first, but all are quite simple in essence.
Contact us to discuss which annuity is right for you.
