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Pension Annuities: The Open Market
Take Time To Consider Your Options Post Budget 2014!
What Are Your Options Since The 2014 Budget?
In April 2014 the Chancellor Of The Exchequer, George Osbourne, announced radical changes for retirees in terms of what you could do with your pension fund. Up until this time you had no choice but to purchase an annuity, so it was just a case of shopping around (using the Open Market Option) to find the best annuity rate. Interestingly it was estimated that over two thirds of retirees were not using their Open Market Option and were missing out on thousands of £££s in retirement income by just buying their annuity from their current pension provider.
So What Should You Do Now?
The first thing is that you should always seek independent advice. An independent advisor is legally bound to act in your best interests and does not work for an annuity provider or insurance company. Below is a brief summary of what options are available which an independent advisor could research on your behalf:
i) ANNUITY: An annuity is still a very tax efficient way of getting assured regular income. But you must seek advice and shop around. Many people (and the FCA estimates over half of retirees) who are currently dissatisfied did not do this, instead taking what their ppension provider offered. If you are concerned that rates are currently low you could consider a fixed term annuity as an interim option. But even so there
ii) FIXED TERM ANNUITY: Effectively, a fixed term annuity allows you to buy an annuity for a fixed period of 1 to 25 years. You can take the 25% cash free lump sum and a regular income as with any normal annuity. However, with a fixed term annuity you have a guaranteed maturity value at the end of the term. At this point you can shop around on the open market for a better annuity deal, but you cannot take another tax-free cash lump sum.
iii) INCOME DRAWDOWN: Income drawdown gives you flexible access to your pension. You can choose how much income you take from yuor pension fund or whether to take income monthly, annually or ad-hoc. You can stop, start or vary income to suit your needs and your tax position.
iv) CASH IN: You can cash in your entire pension fund but you will be taxed at your marginal rate except for the first 25% which can still be taken as a tax free lump sum. The latest update on cashing in is that you can withdraw from your pension fund on an ad hoc basis. However, only 25% will be tax free, so all the tax benefits you have gained by saving into a pension fund will be lost. Typically, on a £100k fund you could end up paying £30k back in tax!
To receive FREE INDEPENDENT ADVICE on any of the above, or just to have a question answered, please complete our short form and an advisor will call you shortly!
Choosing The Right Annuity. The Open Market Option.
A recent survey showed that 2/3rds of people buy their annuities (pension income) from the same provider with whom they built up their pension.
Many people are unaware that they have the right to give their pension pot to whichever annuity provider will pay them the highest income for life. This is known as an open market option. This can make a significant difference to the level of income you receive and therefore your lifestyle in retirement.
You can shop around and obtain quotations from all of the leading providers yourself, a time consuming exercise. Alternatively you can ask a specialist to do this on your behalf. Please complete our no obligation form and we will obtain a quotation for you based on the highest rates we can achieve for you.
Buying an annuity is one of the most important financial decisions you will ever make as it determines the level of income you will receive from retirement for the rest of your life.
It is therefore imperative that you obtain the best level of income from the pension pot you have built up over your working life to ensure you enjoy the highest quality of life in retirement.
Whether you have already decided or you require advice on the most appropriate annuity, or indeed if phased retirement or income drawdown would be more beneficial, then please complete the no obligation quotation form and we will advise you of the best rate we have to offer.
What Should Influence My Choice Of Annuity?
You need to think about more than your current income requirement. How much money will you need in future? Will you need to make provision for your husband or wife or civil partner as well? Are you planning to take a pension commencement lump sum from your pension pot - doing so will reduce the amount of money available for annuity purchase.
In addition to a basic income for you in retirement, your pension fund can also be used to buy a number of additional annuity benefits, such as pensions for dependants, guarantee periods, etc. The basic annuity offers a set level income that will not change. However, in addition to extra benefits you may also elect to purchase an annuity that pays more over time.
However, it is important to remember that the more "additional benefits" you wish your pension to provide, the lower your actual income is likely to be. This is because each of these benefits has a cost, which reduces the proportion of your annuity that is available to provide you with an income. Once the annuity has started you may not change the benefits selected, which means it's important you consider your options very carefully.
When Do I Have To Buy An Annuity?
If you are among the diminishing band of people with a final salary pension then you won't ever have to worry about annuities. However, chances are, unless you are a civil servant or an MP that you won't be in that number.
When you save for your retirement through any kind of pension plan, the money you put in is free of tax and then grows tax efficiently. This is very generous of the government but this is as far as its generosity extends. You might think that the accumulated pension pot is your money to do with as you please. You would be wrong!
You may take part of your pension savings as a tax-free lump sum (now officially known as a pension commencement lump sum or PCLS) up to 25% of the value of your pension funds.
You are no longer required to purchase an annuity with the remainder of your pension funds but there are strict rules and potential tax charges in place that hedge round what you can do with the money. The government's view is that we all get generous tax breaks to save for our pensions and that any money so accumulated should be used to create a pension rather than as a form of saving for our heirs.
You may opt instead of an annuity to take an Unsecured Pension this is the post A Day form of income draw down, whereby you can take up to 25% of your fund as a PCLS and leave the balance invested. You may then take an income, if you wish each year, of between zero and 120% of what a level, standard annuity would pay to someone of your age.
After age 75, you may continue doing a more restricted form of income draw down, called taking an 'Alternatively Secured Pension' or ASP. This allows you to take an annual income of between 0-70% of what a standard level annuity would pay a 75 year old, however old you are. This means that your income will not rise in line with your age.
Leaving your pension funds invested means you are potentially at risk from adverse moves in the market value of what your savings are invested in. This can be a highly risky strategy. It is imperative that you make sure you get independent financial adviceWill I Pay a Fee?
We are paid by pension providers for the work we do and do not charge you a fee.
Will You Shop Around For Us?
In the past, pension annuity advice has been difficult to find, but now by using our dedicated software we are able to make this specialist advice available to everybody.
Taking time now to shop around is time well spent, but you need to be aware of all your options, not just the annuity option. This is where we can help you.
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