Retirement Annuity

Published:  29 Oct at 7 PM
An annuity is a regular income paid in exchange for a lump sum, usually the result of years of investing in an approved, tax-free pension scheme.

There are different types. The vast majority of annuities are conventional and pay a risk-free income that is a guaranteed for life. The amount you receive will depend on your age, whether you are male or female, the size of your pension fund and, in some circumstances, the state of your health. Falling interest rates, poor stock market investment returns and greater life expectancy have seriously devalued annuities over the past decade. In the mid-Nineties someone saving £500 a year into a pension over 25 years might have retired on an annual income of £13,700. Today the same savings would give an annual income of just £3,800.

However, supporters of annuities point out that they offer absolute security for as long as you live. No other product does this and given that life expectancy has been increasing rapidly, this is a major consideration. Level annuities will pay an unchanging income from the outset. An alternative is to buy an annuity that offers payments that rise in line with the RPI, thus maintaining the spending power of your income. Conventional annuities cannot be changed, transferred or surrendered for cash. This makes it essential to choose the best possible deal when the time comes to convert your pension savings into an income.
Many of the financial rules governing retirement changed on A-Day - 6 April 2006.

But tax rules still state that individuals must use their pension pot to buy an annuity by the time they are aged 75. However, A-Day created an exemption as a result of lobbying by a small religious group, the Plymouth Bretheren, because of their opposition to insurance. Its members are allowed to set up what is known as an Alternatively Secured Pension (ASP). Under the ASP, the pension fund remains invested and the individual draws an income from it. There are strict rules about how much income may be taken. Any remaining pension fund must be used to provide an income for your partner or financial dependent upon your death.
Your pension company will want you to choose its annuity offering, but the law says you don't have to. Everyone has the right to use the 'open market option' – shop around and choose the annuity that best suits their needs. There can often be a huge difference between the highest and worst annuity rates available, often amounting to thousands over the average investor's life retirement.

Some insurance companies will pay a higher income if you have certain medical conditions. Statistics show that people with some health conditions have a shorter than average life expectancy. These specialist insurers use this to your advantage: they will pay you a higher income because they calculate that, on average, your income should be paid out for a shorter period of time.

Some older pension policies have special guarantees that mean they will pay a much higher rate than is usual. Guaranteed annuity rates (GARs) could result in an income twice or even three times as high as policies without a GAR.

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