Buying an Annuity

 

Remember, you only get one chance to get your retirement options right, so it is important to choose the correct options. Making the wrong decision will cost you thousands!

 

Your 'pension pot' can be taken at any time after age 55. You are allowed to take up to 25% of your 'pension pot' as a tax free lump sum, with the remaining 75% being used to buy an annuity for the rest of your life, and this part being taxable.

 

By comparing what you can get by using the 'Open Market Option' it is not unusual to have your income increased by up to 25%. If you qualify for an 'Impaired Life' or 'Enhanced' annuity it could be greater, this is because the provider expects to pay out for a shorter period.

 

The amount of income you are offered depends on:

  • The size of your pension fund
  • Your age and home postcode
  • Your state of health and lifestyle choice
  • The annuity options you select
  • Annuity rates and market conditions when you buy.

State of health and lifestyle

Those with pre existing medical conditions may qualify for an 'impaired life' annuity which will secure you a higher rate. Obviously life threatening conditions such as cancer, heart attack or stroke will qualify but so may high cholesterol, blood pressure or a family history of hereditary diseases.

 

Smokers, drinkers and those who are overweight may also qualify for a higher annuity rate, as there lifestyle factors are likely to reduce life expectancy.

Annuity Options

Spouses Pension - You may add your spouse to your annuity, with spouse rates being 50%, 66.67% or 100% of your own annuity income. It guarantees to pay a specified level of income to your spouse in the event that you die before them. As an example:

  • Level annuity paying £10000 per annum with a 50% spouses pension included. So on your death, your spouse will recieve £5000 per annum for the remainder of thier life.

The greater percentage amount of spouses pension chosen, then the lower level of income you will be offered at the outset.

 

Guaranteed Period - An annuity will pay out until you die, at which point the regular income would cease, unless you have opted for a spouses pension. However, if you were to die in the early years of the annuity with no spouses benefit, then the main beneficiary is the provider.

 

So we can include a guaranteed period, meaning that if you were to die in the early years after setting up the annuity, the payments will continue for a pre selected guaranteed period of up to 10 years. The cost of selecting this option is minimal, so well worth considering.

 

Level or Esculating Annuity - When setting up your annuity, you have the option to request that the income you will recieve remain level for the rest of your life. Inflation will erode the value of the annuity over time, but you do know what the payment will be.

 

You can choose an esculating annuity, this option starts at a lower starting rate, but will gradually increase  in payment. You have the option to link the increase to an index such as the Retail Price Index, or have a set increase at between 3% to 5%.

Payment frequency - The majority of people opt to take a monthly income, however you can request that the payments be made quarterly, half yearly or annually. You may also request that the income be made 'in advance' or in 'arrears', with advance meaning you recieve the payment from day 1.

 

A payment made 'yearly in arrears' will provide the highest level of income, wheras 'monthly in advance' would provide the lowest level.

 

All the above options can be combined, so you could opt for a level annuity, with a spouses pension of 50% on your demise, with full income guaranteed for 10 years.

Contact

Tel:   07711 005774

Fax: 0191 5006767

E-mail: tony@emhfp.co.uk

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EMH Financial Planning

11 Constable Gardens

South Shields

NE34 8LR

 

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