What are annuities?
An annuity is a guaranteed income for life and you can buy this with your pension fund at retirement. However, if you are approaching your personal pension retirement age (often set at 55, 60 or 65) an annuity may not be the best option.
I used Just to aid me in my research of annuity policies, and am sharing what I discovered with our readers below.
For many years, pension rules compelled you to swap your fund for an annuity. Now you can take (flexible) income from your pension any time from age 55.
Guaranteed income at a glance
|You get peace of mind because you’re guaranteed the income you’ve arranged.||Annuity rates are low at the moment, so you may not get as much income as you expect right now.|
|You can make plans for the future knowing how much income you’ll have.||It can take many years for the payments from an annuity to add up to more than the pot of money you had saved up in your pension pot.|
|It’s possible to provide an income to your spouse or partner or leave any surplus to your loved ones.||Providing an income to your spouse or partner or leaving any surplus to your loved ones may mean your income will be lower.|
|You can fund this by your Pension fund.||Most annuities aren’t flexible. Once you’ve bought one, you have to stick with it – even if your situation changes.|
|Your payments are protected by the Financial Services Compensation Scheme, so you’ll keep receiving them even if the company paying them runs into difficulties.||Unless you choose an increasing income the amount you receive will remain the same each year. With the effects of inflation, it will buy less as the years go by.|
|You can combine guaranteed income with other types of retirement income.||Unless you choose an investment-linked income, you won’t benefit from economic or stock-market growth.|
What are annuity rates?
When you buy an annuity you give up your pension fund in exchange for a fixed (or increasing) income.
As life expectancy continues to increase, annuity companies compensate for having to pay incomes for longer by lowering the rate they pay.
Building in guarantees (in the event of premature death) might offer some reassurance against the gamble but further reduces the initial rate you get.
Likewise, adding inflation protection reduces your annuity rate. Annuity rates are also affected by government bond (gilt) yields. These are the financial instruments that providers use to support your annuity.
Can annuities be passed to the next generation?
No – Once annuity income starts, you lose this option, whereas a pension can be left to the next generation (by nominating beneficiaries) usually free of inheritance tax.
Do annuities offer lifetime allowance flexibility?
Taking annuity income will trigger an HMRC Lifetime Allowance test. Personal pensions allow this test to be deferred until age 75 or triggered when you choose. You may wish to do this if your overall pension values (including NHS) are approaching £1.055m.
As an example, an annual NHS pension of £45,000 taken at age 60 will use up the £1.055m allowance. Subsequently triggering an annuity could result in a charge of 25 per cent plus income tax or a flat charge of 55%.
There are ways of managing this through a phased withdrawal of tax-free cash or income, only achievable by leaving your pension invested.
Do annuities attract income tax?
Annuity income is subject to income tax, whereas withdrawals from pensions (known as drawdown) can be tailored to suit your income tax position. For example, you can defer drawing income until your self-employed income has reduced.
Income drawdown can facilitate a phased withdrawal of tax-free cash whereas annuities cannot. Funds that aren’t required remain invested. This may enable your pension to grow further and supply a greater income in later years or allow for a fund to be passed to the next generation.
How we can help?
We can help by identifying your need for secure income in retirement and if this is a suitable option, provide you with the most appropriate provider ensuring you are getting the best rates available to you.
Please visit our contact page to get in touch with us.