Pensions
Annuity Purchases
What is an annuity?
An annuity is a regular taxable income paid for life in exchange for a lump sum, usually the result of years of investing in an approved pension scheme. There are different types. The vast majority of annuities chosen are conventional and pay a risk-free income which is 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 or even your postcode.
Are they good value?
Falling interest rates, poor stock market investment returns and greater life expectancy have seriously devalued annuities over the past decade.
However, supporters of annuities point out that they offer absolute security for as long as you live. 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.
Are they flexible?
No. Conventional annuities cannot be changed, transferred or surrendered for cash. This makes it essential to choose the best possible deal when the time comes.
Do I have to buy one?
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.
Pension section links:
advice on occupational pension schemes | stakeholder pension schemes | personal pensions | sipp | post retirement | phased retirement | annuity purchases
Do I have to accept my pension company's annuity offer?
No. 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. A starting point could be to consult your Wardour adviser.
How will health affect annuity income?
If your health is such that you will not be expected to live as long as most other people of your age, you may qualify for enhanced payments. This type of annuity is sometimes known as 'impaired life'. You will need to speak to your Wardour Adviser for an individual assessment.
What else do I need to know?
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.
