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Annuities

Annuities are generally seen as evil, and the recent Budget proposals have enhanced that view. However, they will continue to offer security and peace of mind to many people, with a guaranteed income for life being seen as very attractive. Part of the problem has been that most annuities are sold without advice by commission-hungry salesmen, who have no obligation to make people aware of more suitable alternatives. With many options available, it is no wonder over 60% of people just go with their current pension provider for an Annuity.

However, most of these people could have received a higher income by shopping around.

Why not let us provide you with a FREE, No Obligation Quote and WE do the shopping around for you. We search out the best annuity rated for you.

An annuity is a long term insurance contract bought with your pension pot and one of the ways you can take an income from your funds.

What are my options??

All Insurance companies are required to inform you that you have the option to look around the market place to get the best annuity deal, just as you would with your Car/Home/Pet insurance. The Pension Adviser will provide you with a FREE, NO OBLIGATION ANNUITY COMPARISON, WHICH COULD INCREASE YOUR ANNUITY INCOME SUBSTANTIALLY! We get the best annuity rates.

The Pension Adviser has access to all the insurance companies, including some that you may not have heard of, and due to large amounts of business written with these companies, we may be able to secure you a better annuity from another provider. If there is a possibility to increase to your annuity, we will find it for you and give you all the options available for you to get exactly what you want. You have the right to request that your pension fund is transferred over to a more competitive annuity provider and we compare annuities, the different options and alternative ideas and present them to you in simple to understand terms.

This can be done via an Open Market Option.

The Pension Adviser will help you with all of the options and arrange paperwork, applications, chase through transfers and make the process painless.

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Compulsory Purchase Annuity

An Annuity is purchased when you decide to take an income from a personal or company pension. An Annuity is guaranteed to be paid for life and does not have any link to investments so does not carry any investment risk. An annuity may be written so it is passed on fully or in part to a surviving spouse or dependant partner. Once the policy is set up it cannot be changed or amended. Any income from an annuity is taxable.

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Enhanced / Impaired

An enhanced or impaired life annuity may be available if you, or your partner / spouse have certain qualifying medical conditions or life shortening lifestyle factors. Enhanced Annuity Rates increase your income

Depending on the type of condition and severity, an enhanced or impaired annuity could substantially increase your income compared to a standard annuity.

Any life shortening conditions could provide enhanced rates and some of the main condition/lifestyle factors that generate enhancements are:-

  • Angina
  • Cancer
  • Chronic Obstructive Pulmonary Disease (COPD)
  • Diabetes
  • Emphysema
  • Heart Attack / Heart Conditions
  • High Blood Pressure
  • High Cholesterol
  • Obesity
  • Organ Replacement
  • Stroke (or T.I.A)
  • Currently smoke (an average of 10 cigarettes per day over 10 years)
  • Taking any medication

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Fixed Term Annuities

This type of annuity pays a guaranteed income for a fixed period, often 5 years, but without having to commit for life. This enables you to review your circumstances at the end of the term and decide on the best option for you at that time.

Fixed Term annuities offer the security of a conventional annuity, combined with the flexibility of income Drawdown Rules. Single or Joint options are available and a range of death benefits are available, including the option to take a lump sum on death (Non-Protected Rights).

At the end of the term you can opt to enter into another fixed term plan, buy a lifetime annuity or enter into an Income Drawdown Plan, subject to rules and legislation at the time. This could improve your income as annuity rates could be better than they currently are or you may be entitled to enhanced annuity rates due to ill health.

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Asset-Backed Annuities

This type of annuity pays an income which is ultimately dependent on the performance of the underlying investment. Examples include Income Choice Annuity from Prudential and Flexible Annuity from MGM. Because the income is not guaranteed they are not suitable for everyone but they do offer the potential for an increasing income over time.

Asset-Backed, or Investment-linked, Annuities offer the potential to benefit from investment gains. Historically they have performed well and have provided some protection against inflation, which a level income conventional annuity cannot.

They are generally only considered to be suitable when there are other sources of income on which to draw in retirement, as the income can decrease if returns are poor.

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Tax Free Cash

You can take up to 25% of the pension fund value as a tax free lump sum. It is possible in some policies (mainly where benefits have been built up in a company arrangement) that your lump sum entitlement is greater than 25%. It is important to make the right moves when this is the case as if the whole fund is transferred to another provider before cash is taken, the entitlement to a higher lumps sum can be lost.

If you are lucky enough not to need your Tax Free Cash, you can Phase your retirement and use your Tax Free Cash as income to provide a tax efficient beginning to your retirement (and keep the benefits of the tax free bits). You can also benefit from a slightly better income if you were to take the tax free cash and buy a Purchase Life Annuity.

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Purchase Life Annuities is similar to a pension annuity but is bought with a client own capital and not that of pension savings. It is a more tax efficient than a compulsory annuity as the income payments are split down between return of capital and interest. The PLA owner only pays tax on the interest meaning the income will be slightly higher. Dependng on the situation and type of funds you have, the annuity rates can be slightly better for PLA clients as well.

Therefore, if you are wanting your pension to provide income only, it is still worth taking your tax free cash.

Be Aware that if you have a policy taken out in the 80's and 90's - Guaranteed Annuity Rates are about!!

Quite a few older pension contracts that were set up in the 1980's and early 1990's, were written with Guaranteed annuity rates which was set at the time. These type of policies CAN be very valuable because the annuity rates promised at the time the policy was set up are much higher than standard annuity rates available in the open market today.

However, these policies were generally written so that the income you will receive will not include a spousal benefit, and are often only paid annually. This means that although the income initially seems very attractive, the benefits may not be suitable. We are therefore here to advise you of all of the options available and help you make the right decision for your circumstances.

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The Bells and Whistles of an Annuity

With every annuity, there is a maximum income achievable, and this is a non increasing single life policy with no spousal benefits and no guarantee periods.

Each of the following options that is added to the basic policy will reduce the starting income.

Spouse Pension

Depending on your retirement plans, you may wish to ensure that your spouse, civil partner or long term partner will receive some or all of your annuity income if you pass away first. You can select a level of 'spouse' provision which typically would be 50% of your annuity but you can choose 66% or even 100%. The percentage you choose will affect your starting income.

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Escalation to protect against inflation

Inflation in retirement is said to be worse than inflation for someone who is still working. If you choose a level annuity, the purchasing power of your annuity over time will be reduced by inflation. You can choose to have your pension linked to the Retail prices index or have a fixed rate of escalation of say 3% per year. However, this reduces the initial income significantly and it takes over 20 years to recoup the lost income at an escalation rate of 3%. Speak to one of our advisers for more details and ideas on how to protect yourself whilst getting the most from you annuity.

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Guarantee Period

An annuity is payable for your lifetime, but what if you died in the early years? Some include either a 5 or 10 year guarantee period. This means that if you die after 5 years of buying a Single Life Annuity, and have chosen a 10 year guarantee, your annuity would continue to be paid to your spouse/estate for a further 5 years.

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Frequency/payments

You can opt for monthly, quarterly, half yearly or yearly payments. Once in payment this cannot be altered. Most people choose to take the Annuity on a monthly basis, as this fits in with budgeting requirements.

However for smaller annuities, perhaps a less frequent payment such as yearly may be more desirable as this can pay for one off items/events such as holidays or Christmas???

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Annuity Rates

Standard annuity rates can vary massively from company to company and this is for a few very simple reasons.

  • Guilt Yields and Interest on Deposit accounts are low
  • The annuitant is not in a targeted sector. Insurance company A target specific details like they only want 65 year old males with over £50,000 and who want a single life policy. For these people, Company A's rates will be outstanding.
  • The client has declared that they are a smoker or in ill health. This can make a substantial difference to the rates offered. Typically, rates are increased 5%+ for small ailments like Blood Pressure and Cholesterol and can go up as much as 40% + for more serious, life shortening illnesses.

Generally the rates offered by the 'Big 5' are more competitive than those offered by other big insurers who have decided not to target the annuity market. All providers will offer annuities and some simply see them as an easy moneymaker. They offer bad rates in the hope that the customer will not be bothered to shop around and just go with them because they are convenient. There may be a difference in rates of a few percent for the customer if they had shopped around and we believe that every penny in your pocket is better than in the insurance companies pockets.

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The Cost of Delay

Should you take an income now or wait? This has always been the million-dollar question. The fact is that you may not need the income right now. The main consideration of delaying taking your income is that if you leave your pension fund it could benefit from future potential investment growth. In addition annuity rates tend to increase with age and therefore you could be better off. The final positive is that if you defer taking your annuity and then become ill or get a qualifying medical condition, annuity rates could be significantly higher.

The risks of delaying starting your income are mainly that your pension fund may not grow or even fall in value at the time you don't want it to, the time YOU decide to take benefits (this was especially difficult for a lot of people in 2007-2008). Also annuity rates are not guaranteed to rise. In addition there is also the "cost of delay" to consider, that is, any pension delayed can be difficult to recoup in future years possibly never. If you would like an illustration of how long it would take to recoup this missed income, please ask and adviser for a calculation.

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Annuities - The Risks

Although annuities offer a guaranteed level of income, usually for life, they are not risk-free.

What are the Risks?

  • Inflation - will erode the value of your income over time if you do not opt for the payments to be index-linked. Inflation at 4% reduces £1 to 19p in 20 years.
  • Longevity - Annuity Rates have dropped steadily on the past 15 years as insurers acknowledge that people are living longer and that annuity rates must reflect this.
  • Solvency 2 - Impending Accounting Regulations will force Insurers to hold greater capital reserves to cover their annuity liabilities. This is widely expected to be reflected in reduced annuity rates.
  • Legislation -Widespread consultation across the pensions industry is likely to result in changes to legislation over the coming years.
  • Insolvency - All annuities are covered by the Financial Services Compensation Scheme (FSCS). In the unlikely event that an annuity provider could not fulfil its obligations the Scheme would protect 90% of annuity payments without limit.

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Annuity - What happens when I die?

One of the least attractive elements of an annuity is that the capital is usually retained by the Annuity Provider on death, rather than being passed to your Estate.

If you have opted for a Single Life Annuity then, on your death, the capital would be retained by the annuity provider and the income payments would stop (unless a Guaranteed Period [maximum 10 years] was still in force).

If you had opted for a Joint Life Annuity, and your spouse/dependant survived you, then payments would continue to them for the rest of their life in line with the terms of the policy. This would usually mean an income of 50% / 66% or 100% of the income you had been receiving. If your spouse/dependant had pre-deceased you then no further payments would be made.

Value Protection allows you to choose a lump sum payment option on death, and is available from many annuity providers. It does, however, reduce the annuity income payable.

To get a Free comparison of your annuity options, please complete our Free, No Obligation request for and have a chat with one of our helpful advisers.

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