What is an 'Annuity'?
Annuities are simply a means by which you can convert your existing pension fund to an income that will be paid for the rest of your life. Unlike a 'Pension Drawdown' which is classed as an Unsecured Pension (USP), 'Pension Annuities' are classed as 'Secured Pensions' because the income amount can be guaranteed for life.
A Pension Annuity can be purchased using the whole of your pension fund or, if you prefer, it can be purchased using the remaining fund after you have taken your tax-free cash entitlement (usually around 25%).
The amount that you are entitled to receive from the Annuity will depend on the 'Pension Annuity' rate that is available at the time of purchase.
Unlike an 'Income Drawdown' plan which allows variations in the income payments, with a 'Pension Annuity' the terms are fixed from the start of the plan.
Find out more:
What is a 'Conventional Annuity'?
What are 'Enhanced Annuities' and 'Impaired Annuities'?
Do I qualify for an 'Enhanced Annuities' or 'Impaired Annuity'?
What is the 'Open Market Option'?
What are 'Profit & Investment (Unit) Linked Annuities'?
With Profits Annuities
Unit-linked Annuities
What is a 'Conventional Annuity'?
A basic or 'Conventional Annuity' is calculated for you personally, at a fixed rate. However it is possible for you to add extra benefits to the plan. For example:
- Income for Spouse or Civil Partner
- Increase by inflation or by fixed amount
- Guaranteed minimum period (eg, 5 - 10 yrs)
- Protect capital with Annuity Protection
- Link to returns on investment - With Profit and Investment Linked Annuities
- Enhanced Annuities and Impaired Annuities
NOTE - Any additional benefits will incur extra costs which will effect your level of income.
IMPORTANT - If you have contracted out of the additional 'State Pension' (SERPS or S2P), that proportion of your pension fund has to be used to purchase a Protected Rights Pension Annuity.
This will provide you with the same options as your other pension funds with the exception that you will have to purchase a 'joint-life' Pension Annuity that pays out a 50% spouse’s pension if you are married or with a civil partner.
What are 'Enhanced Annuities' and 'Impaired Annuities'?
There is a possibility that you may be entitled to purchase a Pension Annuity at higher than the standard rate because of your personal health or lifestyle considerations.
There are over 1,000 medical and lifestyle conditions that may be considered and any one, or indeed a combination of which could result in an increase of up to 30% above the standard rate in your income during retirement. It is estimated that around 40% of pension annuities that are paid out could be entitled to the higher rates, however at the moment only around 4% are benefitting from this option.
Do I qualify for an 'Enhanced Annuities' or 'Impaired Annuity'?
There is a good chance that you could qualify to receive the higher rate of return that 'Enhanced Annuities' and 'Impaired Annuities' deliver. Credencis will search the market for the very best packages that are currently available and that suit your personal circumstances. We will need to take a few basic details from you in order perform our search.
To find out if you could qualify, please call 08456 385 047 or email info@credencis.co.uk
What is the 'Open Market Option'?
When the time comes to consider how best to access the funds that are available in your pension, your current pension provider will usually offer you a Pension Annuity. However, unless you are perfectly happy to, you are not obliged to purchase your annuity from them. You have the right to purchase an Annuity from your company of choice.
This is called the “Open Market Option”.
Needless to say, rates will vary between insurance companies and whilst your current provider could offer you a seemingly adequate annuity income package, it may well not be the best. Exercising your "Open Market Option" allows you to shop around and compare rates or arrangements with other providers.
This can be a worth while exercising as, in some cases, the best rate being as much as 50% higher than the worst which could result in the amount that you will receive for the remainder of your life could be greatly increased.
If you belong to an 'Occupational Money Purchase Pension' (through your employment), the trustees of the scheme may, as a matter of course, organise and purchase your Pension Annuity. However, you can still exercise your 'Open Market Option' if you feel you would like to explore the market and find a more suitable option.
Credencis will search the market for the very best rates that are currently available. We will need to take a few basic details from you in order perform our search.
To find out if you could qualify, please call 08456 385 047 or email info@credencis.co.uk
What are 'Profit & Investment (Unit) Linked Annuities'?
As well as a 'Conventional Pension Annuity' you can also purchase an 'Investment Linked' or 'With Profits' Pension Annuity. These options operate on similar principles to conventional annuities with the exception that the level of income is partly determined by the performance of the underlying funds, rather than as a guaranteed sum from outset. As a consequence, the level of income received will clearly depend a great deal upon the investment returns.
With Profits Annuities
'With Profit Annuities' link your pension income to the performance of the insurance company's 'With Profits Fund'.
Your income is, generally, made up of two distinct parts:
a) Minimum starting income -
Usually set at a low level this is the "least" income you expect to receive (unless investment conditions are very bad). There are 'With Profits Annuities' schemes that guarantee this.
b) Bonuses -
Each year, insurance companies will announce bonuses. These 'Bonuses' can be 'reversionary' (announced once a year and are guaranteed to pay out for the duration of the annuity) and 'special' with new bonus rates being announced each year. Of course, the level of any bonus will depend on more than one factor but the key factor is the performance of the 'stockmarket'.
There are insurance company's that will guarantee a bonus rate of around 3% a year and you may be allowed to choose the guaranteed rate however, the higher the guarantee, the lower your 'minimum starting income'.
A 'minimum starting income' will be based on an “assumed bonus rate” (ABR) which can be chosen from a range of rates set by the insurance company. For example, from 0% (which assumes no bonuses at all) and 5%.
If the announced bonus is greater than anticipated by the chosen 'ABR' your income will be increased. Conversely, if less than anticipated, your income will decrease.
Therefore, should you choose an ABR set at 0%, the 'minimum starting income' will be set at the lowest level. Therefore the income will be increased as and when a bonus is declared.
The chances of your income falling is unlikely, although during extended periods of poor stockmarket performance it could be adversely affected it was not "guaranteed" from the start.
Unit-linked Annuities
Your retirement income can be directly linked with the value of an underlying fund of investments. You can choose the type of fund that works for you, for example:
1) A medium risk managed fund -
A fund manager selects a range of different shares and other investments in order to spread the risk over a wider market.
2) High risk fund -
A fund manager will select shares and investments based in a particular country (eg, China, India) or in particular sector or with smaller, growing companies or technologies. This practise can yield great results but because your money is more closely invested, the risk is much clearly higher.
3) Tracker funds -
On the whole, this option is considered to be a medium risk option which tracks the performance of a particular stockmarket index, such as the FTSE-100. Generally this kind of fund carries lower charges than managed funds.
Essentially the more risk involved with the chosen underlying fund, the more your retirement income could vary.
Starting incomes are based on an 'assumed growth rate' (similar the ABR option above). Presuming the fund grows at the "assumed" rate, your income will remain constant. Should the growth exceed the assumed rate, your income will be increased but, of course, if the growth is less than anticipated, again the level of income will fall.
However, there are a few unit-linked annuities that allow funds to be invested in a 'protected fund' which would limit any fall in your pension income.
In general, unit-linked annuities do not tend to offer a guaranteed minimum income. Assuming your growth rate is set at 0%, you could still see a fall in income if the underlying investment fund is reduced.
Essentially you should not choose a 'unit-linked annuity' unless you are prepared and can cope with the effects of an income that is unstable and could even be greatly reduced should market forces make adverse effect.
For more information call 08456 385 047 or email info@credencis.co.uk
