Annuities

What Is An Annuity?

If you've been paying into a pension during your working life, you'll have been building up a fund. However, in order to access that money when you retire, you'll most likely have to turn your 'pension pot' into an income. The most popular way to do this is to buy an annuity.

This involves paying a lump sum from your pension fund to an annuities provider, who'll convert it into an income for you for the rest of your life - no matter how long you live. The exception is if you have a final salary (defined benefit) pension scheme, in which case you'll automatically receive money from your pension when you retire.

How Do You Buy One?

Many schemes let you take your pension income any time between ages 50 and 75. However under new pension rules due to come into effect on 6 April 2010, the minimum age will rise to 55. When you first took out your pension, you probably nominated a specific retirement age, such as 60 or 65. If so, it's unlikely you would be held to that, but if you're retiring early, check that it won't cost you anything as some older pensions have penalty clauses.

The income you'll receive from your pension will depend on a number of factors such as your age, gender, health, the size of your pension fund, the annuity options you select and the rates on the day you buy it. You might also want to receive some of your pension as a tax-free cash lump sum.

You may also be able to take all of your pension as a partly taxable cash lump sum if you are aged between 60 and 75 and the total of your funds is £17,500 or less this tax year.

What To Look For When Buying An Annuity

• You can shop around when the time comes to buy an annuity - this is called using 'the open market option'
• Choose carefully, as once you've bought your annuity and selected your options, you can't normally change your mind
• You don't have to purchase an annuity as soon as you retire, but you must normally do so before age 75. (The exception is if you have an 'Alternatively Secured Pension'.)
• If you want to take any of your pension as a tax free cash lump sum (you can usually take up to 25%), you must do so at the time of purchase
• If all your pension savings total £17,500 or less, and you are aged between 60 and 75, you may be able to take all of this money as a partly taxable cash lump sum.
• If you have a partner, consider buying your annuity on 'joint-life' terms, which will ensure an income continues to be paid if one of you dies
• If you and/or your partner (if you choose a joint-life annuity) have an illness, condition or lifestyle habit that may shorten your life expectancy, such as smoking, you may qualify for an 'enhanced' (impaired life) annuity. This normally pays a higher income
• You can normally opt to be paid monthly, quarterly, half-yearly or yearly, and in advance or in arrears. Whatever the frequency, you'll get the highest income if you can be paid in arrears (at the end of the period)
  

It's important that you seek advice on the type of annuity that is best suited to your circumstances. Please contact us for more information.