Saving for your retirement is essential if you want the financial freedom to enjoy your later years.
One of the critical aspects of retirement planning is how you structure your financial affairs to make sure you have enough money when you stop working.
One in four Britons regret not starting to save for retirement earlier in life and four out of five are unhappy with the amount they are putting into their pension fund every month.
An annuity is just one of several options you have for using your pension pot to provide a retirement income. This is an insurance product that you buy with some, or all, of your pension pot and guarantees a regular retirement income for life.
Annuities come in all shapes and sizes, so it’s vital that you pick the right one for your requirements as once it has been set up it can be difficult, if not impossible, to change.
What is suitable for you will depend on your personal circumstances, your life expectancy and your attitude to risk.
Things To Consider
- You can normally choose to take up to 25% (a quarter) of your pension pot – or of the amount you’re allocating to buy an annuity – as a tax-free lump sum
- You then use the rest to buy an annuity, which will provide you with a regular income for life
- This retirement income is taxed as normal income
- As a rule of thumb, the older you are when you take out an annuity, the higher the income (annuity rate) you’ll get
Different Types of Annuities
There are different types of annuities that provide different levels of income for you and possibly your dependents determined by the provider that you use and the options that you select.
It is therefore important that you give it plenty of consideration before you choose as you could be making an irreversible decision and therefore you may benefit from independent financial advice.
The different types of annuities available include:
- Level annuities. These pay out a flat amount of income every year for the rest of your life. The advantage is that you get the highest rate possible at the outset, but inflation will eat into this over time meaning you won’t be able to buy as much with your money in later years.
- Escalating annuities pay out an increasing amount each year. You can opt for a specific percentage increase each year or in line with inflation, which is usually pegged to the Retail Prices Index (RPI) but could also be to the Consumer Prices Index (CPI) . Your retirement income will be protected from inflation, but these annuities are more expensive to buy.
- Investment-linked annuities are where your income rises and falls in line with investment performance but will never fall below a guaranteed minimum.
- Single life annuities mean the income is paid only to you for your lifetime. These are a very popular type of annuity but if you have a partner who might outlive you it may not be the best option.
- Joint life annuities pay an income to you then, after you die, the income is paid to your partner or spouse for the rest of their lifetime (either at the same or a reduced level).
- Annuities with a guarantee period mean your retirement income is paid out for a guaranteed minimum number of years from the time you take out the policy, even if you die sooner.
- Enhanced annuities are offered by some providers to those in poor health or with lifestyle conditions that mean they might die earlier whereas standard annuities are based on average life expectancy (currently 79.2 years of age for men and 82.9 for women).
- Value protected (or capital protected) annuities give you an option to protect some or all of the value of the original pension fund used to buy your annuity should you die without receiving the full value of your fund.
Planning for Retirement
Making sure you have enough money to enable you to spend your time the way you want to, doing the things you’ve dreamed of doing, is likely to be at the heart of your decision making when retirement planning.
Using some of your pension pot to buy an annuity may form part of a sensible strategy. This means you’ll have at least some guaranteed income for the rest of your life – and so will your spouse if you opt for a joint annuity. However, annuities are not appropriate for everyone.
Obtaining professional financial advice will help ensure you secure the best value retirement income product to achieve your personal retirement goals. Don’t leave it to chance – contact us to discuss your requirements today.
THIS ARTICLE IS FOR INFORMATION PURPOSES ONLY AND DOES NOT CONSTITUTE INDIVIDUAL ADVICE.
Content correct at time of writing and is intended for general information only and should not be construed as advice