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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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