Retirement planning: Annuities...a big, one-off decision thrust upon us!

Thursday, 28th February 2008 17:35 - by Resident IFA

Sorry for the blogging delay...life is hectic! Lately, I am meeting a lot of people who are nearing retirement and seeking my advice on the personal pension funds they have built up over the years. I won’t provide specific retirement advice here, but thought it helpful to point out a few key retirement income topics as starting points of information and explanation. Similar to the phrase ‘DYOR’ (Do Your Own Research) you find in Share Chat rooms, I would say ‘SAIFA’ in this case...Seek An Independent Financial Adviser! (for their opinion and advice in this area). Tax-free cash (Aka Pension Commencement Lump-sum) Pensions are now pretty uniform across-the-board in this regard. Most provide 25% of your pension ‘pot’ as tax-free cash at retirement. Open-Market Option (OMO) This allows you to seek out the best income available from all providers, rather than simply take that level of income on offer from your existing pension provider. Guaranteed Annuity Rates Some older Pensions policies (usually Personal ones, or variants thereof) offer Guaranteed Annuity rates (GAR), meaning a specified rate of income (usually expressed in percentage terms) is provided by the company at retirement. Historically, these generally appear to be higher percentages than that on offer today in most cases. This may affect the use/effectiveness of your Open-market Option, above. Level or Increasing annuity income? A simple choice to take a higher income at outset, or one that increases, perhaps by 3% or RPI (to mimic the increase in the Retail Prices Index). As a statement of fact there will be a point (certain year) in the future, if you live long enough, where the increasing income would catch-up and surpass the level income amount you would receive. Certain types of pension may have a stipulation for a certain amount of increase to be included. Income guarantee periods These allow the income to be guaranteed to revert to your Estate for a set period of time should you die and (i.e.) not have a Spouse named as receiving a residual income in this instance. The guarantee periods available are usually for 5 or 10-year terms. So, in example, if you have a 5-year guarantee and die after 2 years of this, the income will still pay out for the next 3 years. Joint-life annuity? (Spouse’s pension) When choosing your income, this is an option to have a certain amount of ongoing income, i.e. 50%, continue to your Spouse/Civil Partner upon your death. It is costlier, thus usually provides less income at outset than if a Single-life annuity were chosen. Enhanced annuity The situation where a company may increase the amount of pension annuity income they offer, due to your potential life expectancy being shorter than others i.e. a Smoker. Not all companies offer this facility, however. Impaired life annuity Where a person has actually suffered a medical condition, i.e. Heart Attack, and thus has a lesser life expectancy, rather than just a potentially lesser life expectancy. Again, a company may increase the amount of pension annuity income they offer in this instance. Not all companies offer this facility, however. I hope this Annuity Blog helped! Until next time...