Annuities ExplainedWhen to buy your annuity
HM Revenue & Customs (HMRC) offer tax concessions whilst building up savings in pension plans, as long as the funds are ultimately used for providing an income when you retire. You are normally allowed to take out up to 25% of your fund as tax free cash, but the balance must be applied in some way to providing a lifetime income. This will be taxed as earned income, taking into account your personal allowance and income from other sources.
For most people the earliest age at which they may access their pensions is 55. There are some special cases e.g. athletes, where HMRC allow retirement on private pensions earlier.
For the large majority of people reaching retirement, the most appropriate action is to secure an income guaranteed for life. This is achieved by handing over the pension fund to an insurance company which then undertakes to provide the promised income. In doing so they take upon themselves all the future investment risks that you might otherwise have been facing. When calculating how much they can afford to pay you, the insurance company tries to estimate how long you are likely to live. Part of the income they pay you is then actually your own fund ("capital") being returned to you, on top of the investment interest. If you smoke or have a serious medical condition, some insurance companies will offer better rates.
Open Market Option
Whoever your pension plan is with now, you have the option of approaching all the insurance companies offering this type of business, to see who will offer the most income. This is called the Open Market Option (OMO), and it is very important that you take advantage of it because some insurance companies offer much better deals than others. By coming to "buymyannuity", you are doing just that.
Pension Choices
The contract you eventually sign is called a Compulsory Purchase Annuity, and they come with various options. They can:
- Never increase ("Level"), or increase every year ("Escalating") usually by 3%, 5%, or rate of inflation (RPI)
- Stop when you die, or continue paying something to your wife/husband or financial dependant - usually 50%, 66%, or 100% of what you were receiving
- Guarantee to pay the full amount of the income for the first 5 or 10 years in the event that you die before then
Maximum initial income would be from a level annuity without guarantee and which ceases when you die. However its buying power would decrease steadily over time because of the effects of inflation, and a surviving spouse would be left with nothing. All the other options increase the costs for the insurance company, so they pay a lower income initially.
Complete our enquiry form to receive your report to illustrate how much income your fund will buy and how this is affected by your choices.
