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Pension Annuities: The Open Market
What Are Your Options With Your Pension Fund?
In the 2014 budget the Chancellor Of The Exchequer (George Osbourne) announced major reforms in terms of what retirees could do with their pension fund. Up until this time the only option was to use the fund to buy an annuity.
What Are The Alternatives To An Annuity?
i) Cashing In Annuity: This is the main reform of the 2014 budget. You can now cash in your full pension fund. However, you will be taxed (you still get the first 25% tax free). On a £100k pension fund this could cost you up to £30,000.00. A cynic may regard that the budget reforms represent a good payday for the treasury!
ii) Income Drawdown: If you are not risk averse you could consider this as an option. You must take independent advice if you are considering this option. In short your pension fund is invested on your behalf and you can draw from it as and when. However, you need to be aware that the investment does carry risk in that the value of your fund (investment) can go down as well as up.
What Is An Annuity? An annuity is like an insurance policy in reverse. You use your pension fund and effectively buy a guaranteed income for life. You usually have an option as to whether you take the income monthly or annually. You have an option to take a lump sum of up to 25% from your pension fund. This is totally tax free. Obviously this reduces the fund and therefore the amount of regular income you will get.
How Do I Buy An Annuity? You do not have to buy your annuity from your pension provider. Many retirees (up to two thirds) make this mistake and consequently lose £1000s over the rest of their lives. You can shop around to find the annuity provider who will offer the best return. This is known as the Open Market Option. There are hundreds of them and the best way to get the best deal is to use an independent advisor who will work on your behalf to get you the best deal. An independent advisor will work on your behalf, not the pension provider's.
What Is An Enhanced Annuity? If you smoke or are taking medication you may get what is known as an enhanced annuity which means higher regular income. Putting this very crudely the provider will base what they offer you on your life expectancy. So the longer they anticipate you will be drawing the regular income, the less you will get.
Joint Annuities: A joint annuity is one whereby, in the event of your passing, your spouse or partner will continue to receive an income from your annuity. The amount of income they receive can vary to up to 100%.
Level & Variable Annuities: A level annuity is exactly that, you get the same amount of income for the rest of your life, it will not increase or decrease but obviously decreases in value over time due to the effects of inflation. A variable annuity is one that increases each year in line with RPI (retail price index) or at 3% pa. the choice is yours at the start of your annuity but you cannot change this once you have bought your annuity.
Should I Buy An Annuity? Despite some adverse coverage of annuities this is probably the best option for you to get a guaranteed income for the rest of your life. Ultimately the choice is yours but it costs you nothing to find out what you will get from an annuity before deciding what to do.
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Choosing The Right Annuity. The Open Market Option.
A recent survey showed that 2/3rds of people buy their annuities (pension income) from the same provider with whom they built up their pension.
Many people are unaware that they have the right to give their pension pot to whichever annuity provider will pay them the highest income for life. This is known as an open market option. This can make a significant difference to the level of income you receive and therefore your lifestyle in retirement.
You can shop around and obtain quotations from all of the leading providers yourself, a time consuming exercise. Alternatively you can ask a specialist to do this on your behalf. Please complete our no obligation form and we will obtain a quotation for you based on the highest rates we can achieve for you.
Buying an annuity is one of the most important financial decisions you will ever make as it determines the level of income you will receive from retirement for the rest of your life.
It is therefore imperative that you obtain the best level of income from the pension pot you have built up over your working life to ensure you enjoy the highest quality of life in retirement.
Whether you have already decided or you require advice on the most appropriate annuity, or indeed if phased retirement or income drawdown would be more beneficial, then please complete the no obligation quotation form and we will advise you of the best rate we have to offer.
What Should Influence My Choice Of Annuity?
You need to think about more than your current income requirement. How much money will you need in future? Will you need to make provision for your husband or wife or civil partner as well? Are you planning to take a pension commencement lump sum from your pension pot - doing so will reduce the amount of money available for annuity purchase.
In addition to a basic income for you in retirement, your pension fund can also be used to buy a number of additional annuity benefits, such as pensions for dependants, guarantee periods, etc. The basic annuity offers a set level income that will not change. However, in addition to extra benefits you may also elect to purchase an annuity that pays more over time.
However, it is important to remember that the more "additional benefits" you wish your pension to provide, the lower your actual income is likely to be. This is because each of these benefits has a cost, which reduces the proportion of your annuity that is available to provide you with an income. Once the annuity has started you may not change the benefits selected, which means it's important you consider your options very carefully.
When Do I Have To Buy An Annuity?
If you are among the diminishing band of people with a final salary pension then you won't ever have to worry about annuities. However, chances are, unless you are a civil servant or an MP that you won't be in that number.
When you save for your retirement through any kind of pension plan, the money you put in is free of tax and then grows tax efficiently. This is very generous of the government but this is as far as its generosity extends. You might think that the accumulated pension pot is your money to do with as you please. You would be wrong!
You may take part of your pension savings as a tax-free lump sum (now officially known as a pension commencement lump sum or PCLS) up to 25% of the value of your pension funds.
You are no longer required to purchase an annuity with the remainder of your pension funds but there are strict rules and potential tax charges in place that hedge round what you can do with the money. The government's view is that we all get generous tax breaks to save for our pensions and that any money so accumulated should be used to create a pension rather than as a form of saving for our heirs.
You may opt instead of an annuity to take an Unsecured Pension this is the post A Day form of income draw down, whereby you can take up to 25% of your fund as a PCLS and leave the balance invested. You may then take an income, if you wish each year, of between zero and 120% of what a level, standard annuity would pay to someone of your age.
After age 75, you may continue doing a more restricted form of income draw down, called taking an 'Alternatively Secured Pension' or ASP. This allows you to take an annual income of between 0-70% of what a standard level annuity would pay a 75 year old, however old you are. This means that your income will not rise in line with your age.
Leaving your pension funds invested means you are potentially at risk from adverse moves in the market value of what your savings are invested in. This can be a highly risky strategy. It is imperative that you make sure you get independent financial adviceWill I Pay a Fee?
We are paid by pension providers for the work we do and do not charge you a fee.
Will You Shop Around For Us?
In the past, pension annuity advice has been difficult to find, but now by using our dedicated software we are able to make this specialist advice available to everybody.
Taking time now to shop around is time well spent, but you need to be aware of all your options, not just the annuity option. This is where we can help you.
WE ARE TOTALLY INDEPENDENT AND RECOMMEND FROM THE WHOLE UK MARKET.
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