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Pension Annuities: The Open Market
Take Time To Consider Your Options Post Budget 2014!
FIXED TERM ANNUITIES - Keep Your Options Open!
You may have read or been told that once you buy your annuity you cannot change your mind. This is generally true, but there is a little-known option that, in light of the 2014 budget, may now be worth considering. You may need the income from your pension now but want to see what happens in the light of the recent budget announcements. Luckily, a fixed term annuity may provide a solution if you want or need to do something with your pension fund now.
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 deal, but you cannot take another tax-free cash lump sum.
As mentioned above, this may be an attractive option if you wish to do something now but are nervous in the light of the recent changes due to the 2014 budget announcements.
Mr Smith has a £100k pension fund and needs to generate some income but is worried about the current changes in the market following the 2014 budget announcements.
He could take his 25% tax free free cash lump sum which is £25,000.00. Under Budget 2014 legislation he could take the whole pension pot as a cash lump sum (as of April 2015) should he so wish but would be taxed on the residual fund of £75,000.00. This tax bill could be up to £30,000.00.
Effectively he would be sacrificing the tax benefits he has accrued during his working life by saving into a pension fund rather than investing the money elsewhere. He would therefore receive £70,000.00 cash after tax.
A Fixed Term Annuity (taking a fixed term of 3 years for example) would allow him still to take the 25% tax free cash lump sum of £25,000.00. He would then be offered an annuity and a maturity value which could be the following for example:
Annuity: £3000.00 pa
Guaranteed Maturity Value: £66,000.00 + growth.
So, Mr Smith can take the £25,000.00 and receive a regular annuity income of £3000.00 pa and receive a guaranteed maturity value of the residual fund after 3 years. At this stage he could:
i) Shop around on the open market to see if he can get a batter rate
ii) Transfer the fund to a flexible drawdown (which will be the most common alternative to annuities in the light of the 2014 budget)
iii) Take the entire £66,000.00 as a cash lump sum. At this stage he cannot take a further 25% tax free lump sum.
The advantage of this is it does cover a few options. Naturally, all of us currently considering an annuity are confused as to what is going to happen. But equally we may feel as if we're between a rock and a hard place if we need some income from our pension fund in the meantime.
The Fixed Term Annuity option allows us a bit of breathing space to see what happens. In fact, Mr Smith could take the tax free cash lump sum now and defer the annuity for 3 years, say, thus retaining the entire residual fund (+ growth) to see what happens.
It may be - particularly if he qualifies for an enhanced annuity - that taking the annuity now isn't a bad option. But either way, it does allow time just to evaluate where things are going whilst having a level of income to live off in the meantime with peace of mind that there are other options available at the end of the fixed term.
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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