Financial security is all-important to retirees, and despite the fact that it is no longer obligatory to invest a maturing pension pot in an annuity, many people are likely to want to do so, at least in relation to part of their pension pot, because, unlike investments, annuities provide a guaranteed income for life.
The most important factor influencing the amount of income which can be obtained by buying an annuity is the length of time for which the income is likely to be paid – i.e. the prospective lifespan of the annuitant.
The next most important factor is current interest rates, because the insurance company which provides the annuity invests the pension money which it receives in Government securities. Interest rates are currently low, but any future movement is more likely to be up than down.
Other factors are personal to the individual. For example, if the annuitant is in poor health and may have a shorter than normal prospective lifespan, an enhanced level of income will be obtainable. Equally, if the income is payable during the lifetime of a single annuitant, it will be higher than if it were payable for the lifetime of themselves and their spouse or partner, whichever were to live longer. This is a decision for the family.
Decisions will also be required as to whether the income should be fixed or increase by an agreed percentage each year or increase in line with the retail prices index, so as to counter the effects of inflation.
Another option would be to include a guarantee that the annuity would be paid for a specified period of time, perhaps 5 or 10 years or even 30 years. In the event of death during this period, payments would continue to be made to the annuitant’s estate or nominated beneficiaries for the remainder of the period.
It would even be possible to obtain a money-back option, so that if the annuitant died before a pre-set age their estate or nominated beneficiaries would receive a refund of the purchase price, less the payments made and the insurer’s charges. This payment would be free of tax on death before the age of 75.
All these options come at a price, and it is vital to shop around for the best deal – an exercise which is best undertaken through your trusted adviser.
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