If you’re approaching retirement and considering your options, you may have come across annuities. Working along with your pension scheme, an annuity could be the perfect option for those looking for an alternative to a lump sum for managing their money.
As there are different types of annuity, choosing the best for you can feel a little like a minefield. However, with a little guidance and knowledge of the basics, choosing the correct scheme for you can make for a happier retirement.
How an annuity works
In exchange for a lump sum of cash that has usually been invested in a tax-free pension scheme, a regular income will be paid out and is guaranteed for life. When applying for an annuity, the provider will be in contact with an insurance company, who will provide details based on different details such as your health and age.
Some people may worry that their insurer will base their life expectancy against the gender, though this should not be a concern anymore; a ruling by the European Court of Justice has ruled insurers cannot base premiums based upon gender anymore.
At one stage, every retired person had to sign up to an annuity by the age of 75, now there are several options open for people to manage their pension fund. This particular form of payment is perfect for those looking for a guaranteed amount of payment on a regular basis.
The pros and cons
Unfortunately for the current generation of retirees, a combination of falling interest rates, poor stock returns and a longer life expectancy for all means annuity rates are at an all-time low, meaning those who have invested a large amount of money may be stuck with a lower rate of payment per year.
My Pension Expert has discussed the trouble with finding a good rate: “The global economic climate is the main driver for UK annuity rates being at record lows. The pressure on the UK economy has forced down interest rates and brought quantitative easing both measures that have significantly affected UK rates.”
However, many annuity endorsers have stated the regular, fixed income as an overwhelming advantage of the annuity, making even the low rates appealing for many.
My Pension Expert offered the following advice for those interested in a scheme:
“Taking advice at retirement from a professional Independent Financial Adviser is crucial to ensure the best deal in retirement. Taking advice will ensure that retirees will have access to the whole annuity market and all of the many available retirement options and critically the financial Adviser will check for Guaranteed Annuity rates and special conditions like enhanced entitlement to tax free cash.
“By not taking advice a retiree could sign away gold plated benefits written into their pension contracts.”