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What is an annuity?

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You can convert your pension savings into a regular income, which will be paid for the rest of your life.

This is called an annuity. If you are aged between 55 and 77, you can elect to take an annuity any time during these years.

There are a number of options for you to consider when choosing an annuity, each of which can affect the level of income that you will receive in retirement.

One of the most important aspects is being able to draw up to 25% of your pension savings immediately as tax free cash. The remainder can be used to buy an annuity, proving a regular income at intervals that you determine.

Annuities come in two main types of annuity. A conventional lifetime annuity is the most popular choice as it guarantees you a secure income for life. The amount you receive can be fixed or can increase over time. You will have to decide at the outset what you would like to do to enable you to budget your lifestyle.

The other option is an investment annuity which is linked to the stock market. As with all stock market investments, there comes an element of risk and your income is less secure. You do however have more flexibility. Should this particular area interest you then I would strongly urge you to discuss this with one of our annuity specialists.

Types of pension schemes that you are able to convert to an annuity:

  • Stakeholder pension
  • Group personal pension
  • A defined contribution pension with your employer
  • A free standing additional voluntary contribution scheme
  • Retirement annuity contract
  • A Personal pension

With all of these contracts its best to speak to a specialist adviser to ensure that you are making the best and most suitable choice for your circumstances. The main reason for this is because once you have made your choice dependant on what you choose it can not be amended.

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Why choose Income Drawdown?

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Unlike an annuity, with Income Drawdown your money remains invested and you simply take a pension income directly from it.

This is the most flexible way to take your pension benefits, although it may not be suitable if you want the security of income that an annuity offers.

This option might suit you if you want:

  1. To carry on paying in to your pension – if you’re under 77, you can still add to your pension pot and get tax relief
  2. Growth potential – as your pension pot stays actively invested in a tax efficient environment, there is potential for future growth
  3. A flexible pension income – you can take payments to suit you if you have a pension pot that’s large enough to sustain your withdrawals from it
  4. More control – you can buy an annuity at any time
  5. Flexible options on death – unlike some annuities, this pension can give flexible benefit options after your death

How much income will you get?

Income drawdown allows you to take a flexible income directly from your invested pot, within limits set by HM Revenue & Customs. Aside from these limits, the income you’ll get depends on a number of factors. The most important ones are:

    1. The amount of money you have available in your pot to take an income from
    2. How often you draw an income and the amount you take from your pot. The more you take, the less you will have for future years.
    3. How your investments perform. For example, a lower than expected performance can reduce the amount of income you can take in future.

Income Drawdown v Annuity

An annuity is a lifetime contract and cannot be changed once started. For example if annuity rates increase you cannot get a better deal. If you are close to the age 70 or more then annuity rates are likely to be favourable for most people. However a person in their mid 50’s or early 60’s may not benefit from a contract that cannot be changed for the rest of their lives.

However if you have a small pension pot and no other means to support yourself an annuity is likely to be most suitable.

Income drawdown offers younger clients in particular more options in retirement and the chance to see their money grow even after they have retired. As long as you understand the risk versus the reward and have a large enough pension plan (£50,000 typically) to absorb costs etc then these are a viable option.

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Flexible Drawdown

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One of the main perceived disadvantages to pensions and annuities has been the lack of access available to accrued pension funds. However, recent changes in legislation

As long as certain criteria are met, there is the option of no upper limit to the accessible income have brought about exactly what the name suggests greater flexibility from your pension.

You need to have sustainable pension income, that is, guaranteed income, of £20,000 per annum both in the year of your withdrawal and for the rest of your life. You also need to have finished contributing to your pension scheme.

Once the above criteria are met, the remaining fund after all the tax free entitlement can be accessed as income which will be liable to your marginal rate of income tax.

As this option is relatively new, having been allowed since 2010, there are still very few pension companies who facilitate this. As with any retirement decisions, it is wise to take advice before making your final choices.

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Are You Eligible for an Enhanced Annuity?

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You are approaching retirement, have a pension fund, and you have decided that following annuity advice and reviewing all the options available is the way forward.

You are also aware that you can take exercise your Open Market Option to find out who in the market will provide you with the best rate annuity, in other words which company will give you the highest income for your fund. But there is one further consideration.

In the United Kingdom one in three of us may be eligible for a higher income when we retire due to poor health or lifestyle. You may be eligible for an Enhanced Rate annuity, which may mean your pension fund could purchase a higher income in retirement.

The additional income is judged on your lifestyle. For instance, if you are a smoker or over weight you are more likely to suffer from all the health issues associated with that. Being blunt, the companies that supply annuities will take the view that you are less likely to live to a ripe old age in retirement, so they can afford to give you a better income from your pension fund, hence the term ‘Enhanced Rate annuity’.

Applying for an enhanced rate annuity involves the completion of one simple quote request form that all the companies who provide enhanced annuity rates accept. It’s important that you disclose all the relevant medical information, because it may affect your retirement income levels if you withhold lifestyle information and mistakes cannot be corrected later. It may also entail a medical report from your doctor.

Even if you are unsure about your eligibility for an enhanced rate annuity it may still be worth completing the form to find out. Remember this annuity will provide you with an income for the rest of your life so the decisions you make now are important.

Even if you are in good health but considering a joint income with your partner, their lifestyle is also a factor that could influence the rate you are offered.

Once a set of quotations are produced you should compare that with the annuity quote provided by your pension company then simply decide which option is best for you .

With enhanced rate annuity’s seeking independent advice is essential to ensure you get the best possible income available tailored to yourselves and your partner’s lifestyle in retirement. If you have sought advice and your adviser has not discussed enhanced rate annuities, you have not been told of all your options. Remember this is a specialist area and only a select number of annuity companies offer them. We are in times of severe austerity so making sure you get as much income from your pension fund could make a lot of difference to your retirement and what you are able to do during it.

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