In the past, when you got to retirement age, it used to be very simple. You got a cheque and then you started to receive an amount into your bank account every month instead of your salary. Now, you can either:
Over the next 3 weeks, I am going to explain what each of these options are and the pros and cons of each, so you have a bit more information when it comes to making what is a very important decision (you should also seek financial advice). I will also discuss the tax free cash along the way. Today we are going to start with the traditional annuity.
An annuity is where you give an insurance company your pension money and in return they promise to pay you an agreed amount for the rest of your life. You can choose different features of the annuity such as:
These decisions must be made when the annuity is being purchased and cannot be changed at a later date.
That depends on a number of factors:
If you have a personal pension plan, your tax-free lump sum is 25% of the value of the fund and you may buy an annuity with the remainder.
Things are slightly different for people in company paid schemes. If you want an annuity, you must take the 150% of final salary lump sum option. Getting 150% of final salary as a tax free lump sum is dependent on having the required number of years service.
Finally, I leave you with the pros and cons of the annuity options.
You get a secure, regular income for life so you know exactly where you stand.
Once you take the pension, your income level is fixed or indexed to an agreed amount per year and can’t be changed afterwards.
You can choose an annuity type that best suits your needs, such as one that gives a part-pension to your dependants after you die and/or inflation linked.
If you choose a level pension, or one that does not increase each year, inflation will reduce its value during your retirement.
Once you invest in an annuity, you will not need any more investment advice in relation to it.
The annuity rate is fixed the day that you buy the annuity, so you won’t benefit from any later increase in annuity rates.
You don’t need to worry about investment risk as your income is guaranteed.
If you die early and your annuity income is just for your own lifetime, the money you used to buy the annuity does not go to your dependants. Basically, your annuity dies with you.
You pay lower charges than with an Approved Retirement Fund (ARF).