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Annuities-Online is a
trading name of Mortgages-Online Ltd, which is authorised and regulated by The Financial Services Authority
Our FSA No: 442328
Mortgages-Online Ltd is Registered in England No 03450990.
19 Weekday Cross, The Lace Market, Nottingham NG1 2GB
Tel: 0115 9082440
Fax: 0115 8405577
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Introduction to Annuities
What is an Annuity?
An annuity is an investment
sold by insurance companies. It is a way of converting a lump sum, usually a
pension fund built up during your working life, into an income for the rest
of your life. Unlike other investments, it cannot be used up - however long
you live.
This website will help you if you are considering taking retirement income
from the following schemes in the near future:
It may also be useful if you are about to take retirement income from:
This website may not be relevant if you have a final salary pension
scheme. In these schemes your income in retirement is provided by your pension
scheme and you do not need to buy an annuity yourself.
Why do I need an annuity?
Current legislation dictates
that most people must purchase an annuity with their personal pension and stakeholder
pension funds between the ages of 50 and 75. Often you can take up to a quarter
of your pension fund as a tax-free lump sum, although the exact amount will
depend on the type of pension that you have.
It is usually a good idea to take the lump sum from a pension, although there
are circumstances when it might be better not to take the lump sum (e.g. if
there are high guarantees on conversion to an annuity). Many people invest their
tax-free cash elsewhere, either to provide a greater income or for capital growth.
Purchased Life Annuities
You may wish to use your
tax-free cash or any other funds that you have built up to purchase this type
of annuity. This is similar to a pension fund annuity (compulsory purchase annuity)
but is taxed more favourably and should therefore provide more income £ for
£. Remember though, once you have purchased your annuity you cannot normally
convert it back to cash.
Ways to get income from your pension
Rather than buy an annuity
you could leave your pension invested and draw an income directly from the pension
fund (see unsecured pension). This carries risks, so may not be the best option
for you if you're on a tight budget. At any time you can stop income drawdown
and purchase an annuity. We would recommend that you only consider an
unsecured pension
if your pension fund is greater than £150,000 after tax free cash.
An annuity is the most common method of obtaining an income from a pension.
After taking any tax-free lump sum, you use the whole of the remaining fund
to purchase an annuity. The annuity pays an income for the rest of your life.
It's possible to convert only part of your pension to an annuity and delay converting
the rest until a later date - you may wish to do this if you move from full
to part time work as you approach retirement.
Open Market Option
If your pension(s) have this
option then you are free to buy an annuity from any insurance company. You do
not have to buy it from the company with whom you built up your pension fund
if you can get a better deal elsewhere.
Where to buy annuities
Annuities are sold by
insurance companies - as with most things, shopping around can get you a better
deal. Although you can usually buy an annuity from the same company with whom
you built up your pension fund, do not assume it will automatically offer you
the best rate. You may do better by shopping around and checking if another
company could offer you more.
In most cases, you can use your pension fund to buy an annuity from another
company. This is called using your `open market option'. As your insurance company
may not tell you about this automatically, make sure you ask for all the information
you need to shop around for the best deal.
Before shopping around make sure you understand what you already have.
For example:
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Does the company holding your pension fund offer you a guaranteed annuity
rate? (In the past, some insurance companies sold these sorts of plans. Now
that annuity rates are a lot lower, these guarantees can be very valuable,
but might not apply to the type of annuity you need.)
Some companies are keen to attract annuity customers, so they offer competitive
rates; others are less keen. The company you choose can affect your income by
hundreds of pounds a year. When comparing different quotes, make sure they are
based on identical benefits as there are many different options to choose from.
There can be a big difference between the best and the worst annuity rates.
You will usually be worse off in retirement than you need to be if you don't
shop around for the best annuity
Example of how the open market option can get you a better rate
Jerry, aged 65, has a
pension fund of £50,000 left after taking a tax-free lump sum. He is single
and uses the fund to buy an escalating annuity that will increase by 5% each
year. The company with whom he built up his pension offers him an annuity
rate of £526 a year for each £10,000 (5.26%). This would give him a pension
of £2,630
in the starting year (£50,000/£10,000x £526). Jerry finds the best rate he
can get from another company is £580 for each £10,000. This would provide a
starting pension of £2,900 a year (£50,000/£10,000 x £580).
By shopping around, Jerry has increased his
pension by £270 in the first year
and even more in subsequent years.
More than one pension fund?
If you are using more
than one pension fund to buy an annuity, think about combining them when you
are shopping around larger funds often attract better rates.
Advantages of combining your funds:
Possible drawbacks:
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