Money every year for the rest of your life? What's the catch?
In this article you'll learn:
****What annuities are and when they're useful****
What to watch out for when considering an annuity
Go on, be honest - how often do you think of your pension? Unless you're approaching retirement age, it's unlikely you've given much thought to how you're going to make ends meet once your career has wound down and you've stopped full-time work.
Take heart, you're not alone: only 53% of UK employed adults are enrolled in a pension scheme. But if you're anything like me you'll want to know where you're going before you start the journey. If your destination is 'income in retirement', an annuity is one of the most popular options.
How do we define 'annuity'? Assuming you're over 55 and ready to retire, an annuity is a way of receiving your hard-earned pension fund in the form of a secured income. It gives you some of the security you'd receive from a final salary pension scheme, but with your own private pension. Before we look at annuities and when you should use them, let's recap on how pensions work.
Pensions are savings funds that are designed solely to provide income and financial security once you have stop stopped working and have decided to retire. You can decide to retire and start taking income from your pension as long as you are 55 or older. The days of compulsory retirement are long gone; if you want to work until you're 100 then no one can stop you.
Pensions come in three varieties:
- State pensions These are provided by the government to every citizen. Your national insurance contributions, shown on your monthly payslip, cover the costs of the state pension. It's a fundamental and often essential safety net.
- Occupational pensions For years, many companies offered optional pension schemes to employees, but changes to UK law in 2008 now mean enrolment is automatic: unless you actively opt out, you'll be added to your company's pension scheme.
- Personal pensions Private schemes are available to buy, just like any other financial product. A personal pension is independent to your state pension or any occupational pension, meaning contributions must come from your income.
When you reach your pensionable age, you need to decide on a way to access your funds. Under the current UK pension rules, you have four options:
- Income drawdown Gives you the flexibility to take out sums of varying amounts whenever you like, while your remaining money continues to be invested (and exposed to risk).
- ****Full amount** Does exactly what it says on the tin: you receive the full pension amount. But be careful how you spend it! Will you be able to fund a long retirement if you've spent the money?**
- Lump sums If required you can withdraw varying sums to suit your needs.
- ****Annuity**** Gives you guaranteed income for the rest of your life. The pot can rise with inflation and is exposed to stock market risks.
All of these options are tax-free for the first 25% of a lump sum or withdrawal, but only annuities offer guaranteed regular income - and therefore protected against stock market crashes. On top of that, annuities are configured to make it impossible to run out of money, so you won't be left in the lurch. This security is the primary benefit of annuities.
However, as annuities are a type of insurance product, they come in many different shapes, sizes and flavours, and are often complex. But as a safe, dependable way of accessing your pension pot, an annuity income could be the ideal pension option for you and your family.
Read our Annuities: pros and cons article.
If you're thinking about an annuity purchase for your retirement fund, or if your pension is approaching maturity and would like annuity advice, contact Flying Colours today on 0333 241 9900 or request a call back.