Retirement plans are among the more common ways people think about preparing for end of life. There are a number of ways you can provide for or enhance your retirement.
Good health, good friends, good financial planning – the holy trinity of later life.
An annuity is annual income provided by an insurance company in return for a lump sum: your pension, savings or any other pot of money.
An annuity is guaranteed for life – however long you live. Basically, insurers are ‘underwriting’ your life, balancing risk, determining how long you might last from information like age, current state of health, smoker status and even postcode. It’s a win-some-lose-some business for them (and you).
Most people who have a pension fund get an illustration from their pension provider showing how much income their fund will provide in retirement. And most people accept that. However there are other options. It is possible to get better rates of return from the same lump sum: sometimes as much as 40% more.
Note: A European Directive passed a ruling that means insurance companies can’t differentiate based on gender, so men, who currently have a shorter predicted lifespan, and women a longer lifespan now have equalised annuity rates. Please seek professional advice in this area.
Once you accept the annuity illustration from the provider, you can’t change your mind, so shop around first. There are various options.
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Level Annuity: this offers an annual income that is fixed for life.
Indexing Annuity: this is ideal if you come from a good gene pool! It starts at a much lower income initially but will increase each year either by a fixed amount or linked to the Retail Price Index. This ensures that your income will keep pace with inflation though it can take several years until you reach amount the Level Annuity offers. You should consider which option is most appropriate for you, given your health and expected lifespan.
Joint or Single Life Annuity – there is an option that after your death, your annuity income continues and goes to your spouse or civil partner. The amount of pension you receive will initially be lower but it could be a great benefit for a surviving partner.
Guaranteed/Not Guaranteed: if the income is solely for you it can still pay out after death, paying into your estate for the remaining guaranteed period (either 5 or 10 years). Alternatively, it can provide a lump sum to a spouse or civil partner.
Enhanced Annuities: if you have a medical condition, are a smoker or live in a higher risk location it’s possible to get up to 40% more on your basic annuity (regardless of the type of plan you select) by applying for an enhanced annuity. If you are applying for a joint annuity then both of your medical histories will be taken into account.
Other Retirement Options
The options can get quite complex depending on your age, stage, health and your attitude to risk, so we strongly advise you to take independent advice on this.
Income drawdown: in 2011 the government announced that you don’t have to buy an annuity with your pension pot, but may choose to leave the money invested, either phasing in your annuity or taking an income drawdown. (Previously you had to purchase an annuity at age 75 if you had not done this before; now there is no upper age limit.) Whether you choose to leave your pension pot invested or take an annuity will depend on your attitude to risk. If you are very cautious then you may prefer the annuity. Not taking your annuity has inheritance tax implications for the fund.
Flexible drawdown: where it makes financial sense and you can guarantee an ongoing income, you can chose ‘flexible drawdown’ and take your whole pension pot. You should note that this would be taxed as income so is unlikely to be a solution for many but may be worth investigating.
Pre-retirement: there are many opportunities available to enhance your pension pot and to make tax-efficiencies at the same time. You can make pension contributions and receive tax relief on those at your highest marginal rate, within limits. In addition, a pension grows tax efficiently and as such if you have invested in like-for-like funds, it should outperform other investments (assuming similar charges).
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