Do You Have To Buy An Annuity?
June 30, 2008
Annuities are one of the most misunderstood retirement aspects by the ordinary investor, and certainly one of the least popular.
If you die earlier than expected, then you have had a bad deal. Although that may seem bad news, that money subsidises those who live longer – that’s just the way it works. It is a good system to supply people with an income guarantee.
However, there is another option. You are able to use ‘income drawdown’. This is also known as an ‘unsecured pension’. This means that you can take an annual income from your pension fund. That income is limited to between zero and 120 percent of the limit set by the Government Actuary’s Dept. That limit is roughly comparable to the current market annuity rate.
If you choose to use income drawdown and you die before the age of 75, then you can pass your pension benefits to beneficiaries as a lump sum (minus 35% tax charges). Alternatively, dependents can continue with the drawdown or purchase an annuity with what is left.
Up until 2006, anyone using drawdown had to buy an annuity by the age of 75. Now the rules have changed. Individuals over 75 can take an ASP (Alternatively Secured Pension). Using ASP, income limits are tighter than with drawdown and the overall tax charge (82%) applies to any remaining assets upon death. This makes it an unattractive way of passing on assets.
Some pension providers offer ’scheme pensions’ to those over 75. This means an actuary calcualtes the income that can be taken. When calculating, they take into account the person’s health and aim to exhaust the pension fund over the estimated remaining life. This gives more income than ASP, especially if life expenctancy is poor. Remaining assets upon death are subject to similar tax charges as with ASP.
If you are considering drawdown and the consequent post-75 variants instead of an annuity, take good financial advise and ensure you fully understand the risks.
In addition to traditional annuities, retirees can also consider a temporary annuity from as little as five years up to the maximum time of whatever it takes for them to reach the age of 75. This allows them to ‘test-drive’ retirement rather than committing to an irreversible decision.
There are other alternatives too, such as investment-linked annuities or ‘third way’ annuity products to explore. Third way or ‘variable annuities’ try to offer guarantees and more flexibility than traditional annuities.
For many people with a small pension pot, a traditional annuity is often the most sensible choice. For others, a combination of traditional and investment-linked annuities could give a stable income with the chance of an increased income if the investment performs well.
If you are determined not to purchase an annuity, there is always the income drawdown and the consequent post-75 extensions. Seeking financial advice would be wise.
Save £53 Million By Choosing The Right Annuity
June 27, 2008
According to recent research, choosing the wrong annuity is costing retirees in Britain around £53 million in pension income each year.
When you compare the worst and best annuity rates from the traditional annuity providers, the difference can be as much as 27 per cent. This difference can make the difference for retirees between having a decent pension or struggling through their retirement. Compared to a pension income of £6,000 per year, a pensioner could potentially have had a pension income of £7,620! Over an average retirement period, this means the retiree could have lost out on £25,920 or even more Read more