Let’s Talk About Annuities
As we approach retirement age, questions we’ve only hypothetically considered over the past few years suddenly come into sharp focus: how much money will I have to live on when I’m no longer working? Will I be able to guarantee myself a solid standard of living after retirement? How can I make provision for my family if I die before they do? In fact, according to a survey conducted by Retirement Advantage, more people placed ‘certainty of income’ at the top of their retirement wish list than ‘flexibility’. When you think about it, that’s not really a surprise. Who wouldn’t want to enjoy their golden years with financial peace of mind?
Of course, where pensions are concerned there are also other factors to consider. Our national longevity hit the headlines recently when the shadow work and pensions secretary claimed that “projected increases in life expectancy” could justify raising the state pension qualifying age to 68. On the other hand, some academics warned that life expectancy is experiencing “one of the greatest slowdowns for both sexes since the 1890s” and that it’s the government’s austerity policies which could be driving the trend. It’s all very confusing.
Only one thing is certain: when you retire, you must make yourself as financially secure as possible. Which means it’s worth considering annuities.
When the government launched Pension Freedom in the 2015/16 tax year, many commentators believed it would be the death knell for annuities. That hasn’t been the case. In fact, so long as you seek out expert advice before you proceed, the right annuity at the best possible rate can still offer you valuable income security. But it’s vital that you shop around, and don’t just accept whatever may be offered to you by your pension provider.
What is an annuity?
An annuity is an insurance policy. When you retire you’ll have a pension ‘pot’ that includes your State Pension (providing you have 35 qualifying years) and, if you have them, a private pension and/or a company pension. When you sell all, or some, of that pension ‘pot’ to your annuity provider they will – after making calculations based upon your life expectancy – pay you a guaranteed monthly income for life. If you die before your spouse or dependents do, and if you made the proper provisions when you set your annuity plan up, they can be catered for as well.
What’s the difference between an annuity and a pension?
In its most basic terms, a pension is the money you’ve saved to use as an income in later life. You own your pension pot and you can use it however you’d like, as well as pass on whatever’s left when you die.
An annuity means you no longer have ownership of your pot, but you do have the security of receiving an income for as long as you live.
What sort of income can I expect from an annuity?
The amount of income you’ll receive each year is a percentage of the value of your pension pot when you sold it to the annuity provider. This percentage is determined by several factors, including the type of annuity you decide to buy.
A standard annuity gives you a guaranteed income for life but stops the day you die.
A joint-life annuity provides you with a guaranteed income for life, and then transfers to your spouse, partner or any other beneficiary when you die. It can also be used to pay income to a dependent child.
An enhanced annuity offers a higher annuity rate (i.e. more money per year) if you suffer from certain health conditions.
An escalating annuity lets you increase your annual income, for example in line with inflation.
A fixed-term annuity means you can secure a guaranteed income plus a maturity amount for an agreed number of years. You won’t have to commit to it forever.
Of course, these are only the broad brushstrokes of what each annuity does. That’s why it’s important to take expert guidance before you make your decision.
Think very carefully…
When you retire, determining the best way to make your hard-earned pension work for you is probably the most important life decision you’ll make. There’s a lot to consider. What are your current circumstances and what are your hopes for the future? Do you want security or are you prepared to take a risk? What about the people you leave behind after you die? There are more new products on the market than ever before, which gives the canny investor a lot of flexibility. However, there are also lots of opportunities to make a big mistake with your valuable pension pot if you’re ill-informed.
Here at Moyes Investments we’ll identify your options, help you make the decision that’s right for you, and hold your hand throughout the entire process. After all, it’s not just our expertise you’re getting, it’s the personal service we are renowned for. If you’d like to know more about annuities, pensions or how to protect your loved ones beyond your lifetime, don’t hesitate to call us on 01638 429975 or [email protected]