Annuity Options – Pensionfinder
Before you start thinking about income drawdown, it is important to look at other annuity options, mainly lifetime annuities. Neither of these options are perfect. They both have major advantages and disadvantages which can be nullified or exacerbated depending on your individual circumstances. It would be incorrect to dismiss either option without thorough investigation because what is good for one pension holder may not be the right choice for another.
This is the most basic and common pension choice which is chosen by those looking for a hassle-free way of securing their money. Once you are allowed access to your pension, you can withdraw 25% of the total fund tax-free and purchase an annuity for life with the remaining money. There are dozens of insurance companies in the UK that offer annuities with numerous websites offering comparisons between these corporations.
Single Or Joint
When you are purchasing a lifetime annuity, you are given a handful of choices. A single life annuity is the most common and provides you with a constant source of secured income for life. A joint life annuity continues to pay your spouse or partner the remaining value of the fund in regular payments which will be less than what is received with single life annuities.
Fixed Level Or Value Protected
Another option gives you the choice of maintaining the same level of income each year or an income that starts at a lower level then rises every year. While the set level income is an attractive initial option, be sure to factor inflation into your calculations. The value protected annuity pays a lump sum to a beneficiary of your choosing if you were to die before the age of 75. This sum depends on the original value of the annuity and the amount paid out so far as the former is subtracted from the latter. This sum is then taxed at a rate of 35%.
Certain companies actually pay higher levels of income should you suffer from a serious illness. This may seem strange until you realise that this is not insurance, it is money you are entitled to. So if you have a shorter time to live potentially, you should receive a higher income.
The common consensus is that annuities are fixed. In actual fact, it is possible to purchase investment based annuities which involve placing the pension fund into investment funds. This could lead to a higher return on investment than fixed annuities but there is always the danger that the fund will fall in value costing the pension holder money. The articles ahead discuss fixed rate annuities only.
One reason why many people are steering clear of annuities is the lack of flexibility. All benefits must be chosen at the start and neither the terms nor the provider can be changed. The annuity gives you a fixed income for the rest of your life or that of your spouse should you choose a spouse’s pension. If you have not chosen extra options, the value of your annuity will be zero the day you die. Any references to spouses in the following articles relate to financial dependents as well as civil partners.
This is another name for Pension Commencement Lump Sum. In almost all cases, once you reach retirement age, you will be allowed withdraw up to 25% of the value of your pension in tax-free cash. Your remaining money will be used to provide taxable income. Although it is tempting to immediately withdraw this amount, remember that it will result in less income available in future.
It is possible to withdraw the cash and place it back into another pension but certain providers have rules against this and may charge a heavy rate of tax. Such a practice is viewed as ‘cash recycling’ and is generally frowned upon. If you take benefits via income drawdown or any other form, what is known as a ‘Benefit Crystallisation Event’ will occur.