A huge reform of the defined contribution pension system (as opposed to workplace final salary schemes) announced in Budget 2014 means that under the proposals, from next year, millions of people reaching retirement age will be able to spend their pension pot in any way they want.
The pension reform proposals are set to come into force in April 2015 and they will provide a wider choice over how you eventually use your accumulated pension pot.
Given the significance of these changes, there is still however a continuing role for annuities, especially where you seek the peace of mind for a lifelong secure regular income.
Thinking about retirement?
Covering a minimum level of living costs and regular outgoings – for life
An annuity provides a fixed, guaranteed income, however long you live for. As part of your retirement planning, if you favour income drawdown you may still want to purchase an annuity to cover a minimum level of living costs and regular outgoings. It is important that you shop around for the best annuity rates to ensure that you are able to benefit from the highest retirement income available for life.
A pension annuity converts the funds built up in your pension scheme(s) into a regular income. The income is then payable for the rest of your life. So why would you still consider an annuity as part of your retirement plans?
Qualifying for an enhanced annuity
A significant number of people at retirement could qualify for an enhanced annuity. These typically offer rates from between 15% to 20% higher on average than a standard annuity if you are suffering from certain specified health or even lifestyle conditions. This could make them very attractive if you are seeking the maximum guaranteed income throughout your life.
Security and reassurance
With an annuity, the income is guaranteed, regardless of market movements, how long you live for or any changes in your circumstances. This can provide security and reassurance for you during your retirement. Unlike many other investment products, the quoted rate has no ongoing costs, fees or charges deducted. In addition, annuities are simple to understand, and do not need to be reviewed or managed on an ongoing basis. Once the annuity is set up, there is nothing more for you to do. A fixed payment is made to your bank account each and every month, for the rest of your life.
Tax matters
If you were born between 6 April 1938 and 5 April 1948 the personal allowance is currently £10,500 (2014/15 tax year). This means that in retirement you could potentially pay less or actually no income tax. Taking your entire pension fund as a lump sum before you have considered all of your options could result in a significant tax bill. In addition, you may also potentially pay more tax than necessary on your future income. Withdrawing the fund as cash, apart from the 25% tax-free element, could generate a tax charge. Annuities are purchased gross, so no tax is payable on the fund when it is used to buy your annuity.
Tax is subject to change and depends on individual circumstances.
The Financial Conduct Authority does not regulate Tax Advice.
Scheme guarantees
Regulatory capital requirements mean annuity providers have to be financially robust and well capitalised. In the unlikely event that a provider cannot meet their obligations, a Government-backed scheme guarantees to pay 90% of the amount promised.
Information is based on our current understanding of taxation legislation and regulations. The level of income you receive from your pension plan will depend upon a number of factors including the value of the plan when you decide to take your pension, which isn’t guaranteed and can go down as well as up.
