Pension Annuities

July 15, 2024 admin

A pension annuity provides a regular income which will be paid for the rest of your life, in exchange for a cash lump sum.

Usually, you will be able to take up to 25% of the total amount as a tax-free lump sum, although some plans will allow you to take a higher level of tax-free cash. Whatever the level of tax-free cash you take, remember than the more you take, the lower your income will be.

Who can purchase an annuity?

Many people use a pension annuity to provide them with their retirement income. There are three main types of pension:

State Pension: payable to those who are entitled and over the state pension age.
Company Pension: set up through your employment, where payments are made by yourself, your employer or both. With company pensions, there are final salary schemes (calculated on your salary and years of service) and ‘money purchase’ (involving an investment similar to a private pension).
Private Pension: set up by individuals with a bank, building society or insurance company, where funds are invested on your behalf.

If you have a private pension or ‘money purchase’ company pension, you can use a pension annuity to convert the funds you have built up into a regular income which is paid for the rest of your life, tailored to your circumstances.

Your open market option

When you’re coming up to retirement, your pension provider(s) will write to advise you of your fund value(s) and tell you how much income you would receive from them. However, the annuity offered may not be competitive, and you may be able to get a bigger retirement income from a different provider.

The ‘open market option’ is your right to shopping around to make sure you get the best possible deal for your future pension – allowing you to buy a conventional annuity from any provider on the market. It is extremely important to shop around to ensure that you get the most retirement income possible, especially as annuity rates have fallen to record lows in recent years.

Only one chance!

Buying the right pension is extremely important as, once bought, they cannot be changed to a different type of annuity or altered in any way.

Shopping around to find the best annuity rates can be extremely time consuming, but you can get a broker to do all the hard work for you.

You should choose a broker that searches the whole annuity market and will check to see if you qualify for enhanced rates due to your health or lifestyle conditions.

Changes in the March 2014 Budget: The Chancellor proposed that from April 2015 pension investors who have reached 55 should be able to take the whole of their pension as cash. The first 25% should be tax free, whilst they will have to pay tax on the rest, but only at their highest marginal rate. This is subject to consultation but could make a great difference to your retirement.

Why not contact Key Retirement Solutions if you need further help or advice.