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Annuities produce a guaranteed lifetime income. People with personal and stakeholder pensions are required to put a lump sum into an annuity, which will pay them for the rest of their lives.
Most annuities are conventional, paying a risk-free income. The amount one receives is dependent on age, gender, the size of one's pension fund, and sometimes on one's health. In the latter case, some insurance companies will pay a higher income if one has certain medical conditions, generally those that decrease lifespan.
Annuities have decreased in value over the past two decades due to declining interest rates, longer life expectancy, and poor investment returns. Yet they still offer a secure income for as long as one lives, something no other product does. Given today's longer life expectancy, this can be very valuable to pensioners.
Types of Annuities
Level annuities pay pensioners the same income every year. This can prove problematic in inflationary periods when the buying power of one's money decreases. The alternative is to buy annuities whose payments rise in line with the Retail Price Index. This maintains the real value of one's money over the long-term. Older pensions occasionally have special guaranteed annuity rates, which pay much higher rates than most others.
While annuities are valuable, they're also inflexible. One cannot change, transfer, or convert annuities to cash. Thus it's very important to choose the right type of annuity. Pensioners should investigate all the options and if they need help, they should consult with an Independent Financial Advisor before making a decision.
Are The Required?
Tax rules state that most people must purchase an annuity with their pension fund by age 75. One exception is for the Plymouth Brethren, a religious organisation opposed to insurance. Members are allowed to set up an Alternatively Secured Pension. In this pension scheme, people draw an income from their pension fund, which remains invested. On death, any remaining money in the fund must go to providing an income for one's partner or dependents.
Choice of Annuities
It's not required to purchase an annuity from the company that has been managing one's pension fund. That company would like people to buy their annuities, but the law doesn't require it. The open market option allows people to shop around for the annuity that best meets their individual needs. Research is vital, especially a comparison of annuity rates, as the difference between the best and worst rates can amount to a difference of thousands over the whole of one's retirement.