Annuities and Open market Options
 What
is an Annuity?
An annuity is the income paid to you for life by an Insurer in return for
a lump sum paid to them either from your pension fund or your own capital. Until 2006 it was compulsory to buy an annuity by the age of 75, at the latest, if you were had a private pension or if your company scheme was money purchase rather than final salary. Now, however, you don't have to buy an annuity although most people probably still will. The alternative, at age 75, is to switch to an Alternative Secured Pension(ASP). This allows you to draw an income of up to 70% of what you would have got from an annuity. They're quite complicated so to learn more, go to this article by Francis Clark Financial Planning. However, most people will still purchase an annuity, so read on to find out more.
Whilst it's nice to retire, it’s even better, if you have a large enough
income, to enjoy it! However, with real costs of living increasing faster than
pensions, now more than ever, it is important to ensure that you get the
best income from your pension or the savings you have built up during your
working life.
That’s why legalisation now insists that all personal pension providers
give you an Open Market Option - the right to shop around for the best
annuity, before taking the benefits simply from your existing pension.
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So before accepting the pension on offer from the company
you have saved with, seek independent advice and quotes from other companies,
as you may be able to:
- Improve the income provided by some 10-20%
- Benefit even more should you or your spouse suffer from poor health
- Consolidate different small pension funds, to receive just one
larger income, making budgeting easier.
You can provide an income just for yourself, in which case the income
would stop on your death. If you have someone else whom you would like to
provide for, if you are happy to accept a smaller pension for yourself, you
can provide that either your pension would continue for the balance of 5 or
10 years or provide for a spouse’s pension. In the latter case,
they would then continue to
receive an income for the rest of their life , however long that proves to
be.
What about Tax?
Pension Annuities (sometime referred to as Compulsory Purchased
Annuities-(CPA’s) are taxed at source through the PAYE system. Income tax
is deducted at the basic rate. Non-tax payers can claim this back while
higher-rate taxpayers have to pay more through self-assessment.
Voluntary Purchased Life Annuities (VPLA’s) purchased from your own
money, consist of two elements. The first is the return of the purchase money, which is tax
free. The other is interest paid by the provider for holding this money for
you. This second part is taxed as unearned income at currently 20% for
standard rate taxpayers with higher rate taxpayers paying an additional
20%(2008/9). As the interest element decreases and the non- taxed capital
element increases the older you take the annuity, this can be a very tax
efficient income source.
Please note: Levels, bases and reliefs from taxation are subject to
change.
Annuity / Open Market Options – Risk warnings
Purchased Life Annuities can be a very good way of securing a tax
–efficient, guaranteed income, but may not be right for everyone.
So it is important to get Independent Financial Advice.
If you are considering purchasing an annuity, take note of the following: |
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| Once purchased an annuity cannot be cashed in
at any time
- The real value of Level annuities will gradually be eroded by
inflation over time.
- Unless a guaranteed or spouse's pension has been selected, there will
be no benefit available to your estate on your death, and the amount
received may have been less than the amount you used to buy the annuity
with.
- Once purchased, an annuity rate is guaranteed but as annuity rates
are partly based on age, should you defer purchasing your annuity until
you are older, better rates may be available.
- Transfers of pension funds may take some time to be received by the
recommended new provider if you have used the open market option.
Therefore, the value of the existing fund
may change, sometimes quite significantly, before being transferred. A
final figure will only be confirmed once the transfer actually takes
place.
- Impaired rates quoted on the basis of medical information supplied
by yourself are liable to change should the provider seek medical
references and the information received from your doctor differs from
the information supplied by you.
- Income Tax rates are liable to change and may increase during the
period you benefit from the annuity, leading to a reduction in net
income received.
Have a look at Hargreaves Lansdown's
Annuity Supermarket page, which will give you a better idea about the
open market option.
The FSA (Financial Services Authority) produces a very useful guide to
annuities and pensions
http://www.moneymadeclear.fsa.gov.uk/pdfs/retirement_options.pdf
We have included a link to the current version at time of writing but
suggest you use the FSA site search facility to ensure it is the most recent.
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LINKS TO OTHER INDEPENDENT FINANCIAL
ADVICE PAGES
Retirement Planning &
Independent Financial Advice, Retirement
Pension Planning, Inheritance Tax
Planning, Equity Release, Long Term Care, Making a Will,
Annuities,
Finding an Independent Financial Adviser
Take a look at our overall section on retirement planning too.
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