All the things you want to know about your pension options:
This is a Retirement Benefit income which is secured by purchasing an annuity for life from an annuity provider. Most people need a minimum level of guaranteed income for life, so they use their pension savings to buy a lifetime annuity that will pay them an income until they die. In addition, if you’re in poor health or have an unhealthy lifestyle, you may be entitled to an enhanced or impaired annuity, which pays out a higher pension income than other annuities.
Unfortunately, this topic starts to become a little bit morbid! Basically, the more conditions you have that will affect your life expectancy, the higher the income you will receive. If an annuity provider thinks you will live for a long time, they will want to pay out less each year. It makes sense from their point of view!
What they’ll do is estimate how long you might live. This is based on factors such as, where you live, how old you are, and what you do for a living, in addition to this current or previous medical issues and whether you smoke, are overweight or have high blood pressure will be taken into account. All of these factors have been known to affect how long you will live.
This is more like ‘a best guess’ on the part of the annuity providers, rather than a science but they will pay you an amount of money each year, according to their estimate of how long you will live.
The good thing about annuities from your point of view is that you’ll receive an income for life without personal risk to you.
These types of annuities are not provided by everyone. This is another reason why you might not want to choose the quote from your existing provider.
*To receive any uplift depends on health or life-style factors. The figure of 35% that we show on our website is based on the fact that 65% of our customers have health or lifestyle factors and also can be verified from an independent source ipipeline.
Give us a call and see if you could benefit from our service. You have nothing to lose and everything to gain by calling. We look forward to hearing from you!
Fixed Term Annuity
A fixed-term annuity provides a regular retirement income for a set number of years – often 5 or 10 – as well as a ‘maturity amount’ at the end of the specified period. You can then use the maturity amount to invest in another retirement income product, such as another fixed term annuity, lifetime annuity or even income drawdown.
With a fixed-term annuity delivering a guaranteed income, you can also choose the level of the income and the maturity amount you’ll need to invest at the end of the term. The higher the income you choose, the lower the maturity amount will be.
- You must be aged 55 or over.
- The term can be between 1 and 25 years.
- There is no maximum age.
- You can choose to take a level income, an increasing income or no income at all. The options available to you are the same as a standard lifetime annuity.
- The minimum investment is £10,000 (after any tax-free cash has been taken).
- Once your plan starts you can’t cash it in until the term has ended.
- Only accept funds from registered UK pension schemes – you can invest part or your entire pension fund in a protected retirement plan.
- How much income tax you pay on your annuity income depends on your personal circumstances.
You can choose to convert your entire pension to drawdown all at once, or you can convert smaller segments as and when you need them (this is known as partial drawdown).
You continue to manage and control your pension fund and make all the investment decisions. Providing the fund is not depleted by excessive income withdrawals, or poor investment performance, it may be possible to increase your income later in life. However, if you get it wrong, your income will be reduced.
Income drawdown allows you to choose the income level you wish to withdraw from your pension ranging from no income at all up to a capped maximum income. You choose where your fund is invested and should review and monitor the situation regularly. Anyone age 55 or above is eligible for income drawdown, but it is a high risk option so is not suitable for everyone. Happy2retire do not provide guidance on this type of product and this service is provided by Happy2advise.
With effect from 27 March 2014 the limit on the amount you can withdraw increased to 150% of an annuity income. The limits are calculated at the start of your income drawdown plan using GAD (Government Actuary Department) tables, which use your age and 15 year gilt yields to calculate the income available from your fund.
Any income is subject to tax at source, on a PAYE (Pay As You Earn) basis. How much income tax you pay on your drawndown income depends on your personal circumstances.
Some investors may be able to remove the cap on their income by applying for flexible drawdown.
As the name suggests this option is much more flexible than income drawdown. Qualifying for this option removes the cap on the income you can take.
There are no income limits at all and you can draw as much income as you like when you like. The more you withdraw now, the less you will have available to use as income in the future. You continue to choose where your pension is invested and your money remains subject to market fluctuations. The amount you will have available to withdraw in the future will therefore also rise or fall depending on investment performance.
You must already have a secure pension income of at least £12,000 a year in place. This can include your state pension, a pension annuity or a company pension. Investment income and money from income drawdown don’t count. Pension pots not needed to provide the £12,000 could be taken as flexible drawdown.
Pensions can be split, with part used to buy an annuity to secure the necessary income and the remainder taken as flexible drawdown (however the government are currently in consultation on their intention to remove restrictions on taking income from pension funds from April 2015).
Flexible drawdown can only be taken once you have finished saving into pensions. If pension contributions have been made to any pension in the same tax year or if you are still an active member of a final salary scheme, it isn’t possible to start flexible drawdown. Once in flexible drawdown it effectively isn’t possible to make further pension contributions.
With Profits Annuity
If you’d like to give your retirement income the potential to grow and you’re happy to accept an element of risk, you could choose a with-profits annuity which directly links annuity income with the performance of a with-profits fund. Therefore, the retirement income is linked to an annual bonus rate declared by the annuity provider, rather than a guaranteed lifetime income. The aim is to grow your money invested in a with- profits fund over a medium to long term.
A with-profits annuity breaks the link between annuities and low bond yields and provides the opportunity for longer-term income growth but with a degree of risk. With-profits annuities have many of the characteristics of non-profit annuities but the main difference is that the future level of income will vary depending on the value of the with profit bonus. Happy2retire do not provide guidance on this type on annuity and this service is provided by Happy2advise.
What are the benefits?
• Growth potential. The amount of income you receive has the potential to increase over time.
• Smoothing process. This is a method of reducing the ups and downs in the value of your investment by paying out the returns through a system of bonuses. There may be times in extremely poor market conditions when smoothing cannot fully protect your pension income.
• Your income can be paid monthly or yearly, either in advance or in arrears.
• No additional charges. Charges are taken into account when your initial income
is worked out and when the bonus is decided to be added to your pension income each year.
Things to think about
• Depending on how long you live you may get back less than you bought your annuity for.
• No cash-in value. Once you’ve bought your annuity it cannot be cashed in at any time.
• If you die within the first 90 days of the date your plan starts, and any dependant named on the policy dies before you, value protection will apply and a lump sum will be payable to your estate.
• If you die after 90 days but within your guarantee period, payments will continue until the end of the guarantee period. These will be paid to your estate or dependant on the policy.
• Your income will vary. The amount of income you receive has the potential to go down as well as up. However, a guaranteed minimum floor means your income will never fall below a specified minimum amount.
Your income is based on the anticipated bonus rate you choose and will fluctuate
in relation to any regular and additional bonuses declared each year. After 12 months you can change the anticipated bonus rate within the limits in force at the time, or you can convert your plan to a pension annuity.
Now’s the time to consider exactly what you want from your annuity. As we’ve said already, there are several different options. As you’d expect, if your pension fund is large, your annual income will be larger and vice versa. As a general rule, the more options you want, the more your annual income will decrease.