The myths, mysteries and the magic
For many people pension annuities are a total mystery, something they’ve heard referred to in the dim and distant past but not looked into because, after all retirement was such a long way away. They don’t really know what they are or how they work, whether they need one, or how to get one if they do.
WHAT IS AN ANNUITY?
An annuity is a way of ensuring the money you’ve saved for your retirement will provide a regular income for the rest of your life.
If you have one or more company or private pension funds you’ll be able to take some of the cash you’ve accumulated as a tax-free lump sum. With the rest you can buy an annuity.
Some annuities also guarantee your income for a specific number of years, even if you die before the period is up. Others offer value protection which ensures any remaining funds will be paid to your dependants if you die sooner than expected.
Once you’ve chosen an annuity, it's permanent and you can’t normally change it at a later date. That means it’s extremely important you make the right choice. Making the wrong choice could reduce your retirement income drastically.
Our annuity experts are here to talk you through the best approach for you.
DO I HAVE TO BUY AN ANNUITY?
No, you don’t have to take an annuity when you retire - there are alternatives. More importantly you don’t have to take the annuity your pension provider offers.
When the time comes to take your pension, your provider will send you an annuity offer. However, before you accept it, you should shop around, talk to one of our annuity experts and get a few alternative quotes.
If you have more than one pension plan you could have more than one annuity and take them at different times. Or you might be better off combining your funds into a single annuity.
It depends upon your personal and financial circumstances, the state of your health, and what you want from your retirement income. Speak to one of our expert advisers for guidance.
WHAT ARE YOUR OPTIONS?
You have the right to choose who to buy the annuity from. You can also choose what type of annuity to buy or buy one at a later date when you're ready.
You can choose how often you want to receive your income: monthly, quarterly, half-yearly or yearly. You can also choose when the money goes into your bank account - at the start (in advance) or the end (in arrears) of each period.
Being paid ‘yearly in arrears’ will give you the highest income, as this gives the provider company more time to invest your funds. ‘Yearly in advance’ will provide the lowest income.
Spouse’s pension (Joint Life)
A Joint Life annuity will pay you an income for the rest of your life. It will then go on to pay an income to your spouse, civil partner, or a dependant for the rest of their life after you die.
You can guarantee your annuity for a specific number of years. This means it will continue to pay the income even if you die before the specified period is up. Selecting a guarantee period will provide a slightly lower level of income, but it guarantees that your estate continues to receive the income.
Value protection is a way of protecting the value of your annuity in case you die earlier than expected. If you take this option a proportion of your original pension will be returned to your beneficiaries as a lump sum, although 55% will be deducted for tax.
You can decide whether your annuity will pay a fixed income or one that increases to protect you against inflation.
- A level annuity may provide a very comfortable income today. But in ten or twenty years’ time inflation will reduce its value substantially.
- An escalating annuity which increases with inflation will initially provide a lower income, but its value over the years will give you consistent buying power for life
- Alternatively, you can select a fixed percentage increase – say for example 3% - which would provide a consistent annual increase year on year regardless of whether inflation is higher or lower
Health and lifestyle
You may be able to benefit from an enhanced or impaired life annuity which pays a higher income if your lifestyle or your health could reduce your life expectancy. Even if you think you’re healthy, if you’re a smoker, overweight or taking any medication it could boost your retirement income.
WHAT ARE THE ALTERNATIVES?
Everyone’s finances are different so buying an annuity at retirement may not always be the best option for you. If you don’t want an annuity, or if you decide to delay buying one, there are a few other options you might consider.
If you don’t want to use your pension fund to buy an annuity immediately on retirement you could consider investing in an LV= Protected Retirement Plan. This will provide you with a fixed income for a specified period. At the end of that time, if you're still alive, you'll be paid a guaranteed lump sum.
SHOULD I LOOK AT THE OPEN MARKET OPTION?
It would benefit most people to take the Open Market Option and shop around for their annuity. The difference between the worst and the best basic rates available can be huge
But the basic rate isn’t the only consideration. If you’re in poor health, a heavy drinker, or a smoker, you could qualify for an enhanced annuity. We estimate that this could increase your income by as much as 30%* over a standard annuity.
You should also look at whether they are offering a single or joint-life annuity and whether it’s a level or escalating annuity.
When deciding which option to take at retirement there is a lot to think about and our expert advisers will ensure you make the right decision to suit your retirement needs.
*You could in some cases significantly increase your retirement income.
WHEN SHOULD I START THINKING ABOUT IT?
The important thing is not to leave it till the last minute. You should receive annual forecasts from your pension provider and they should send you an annuity quote some time before you plan to retire.
It’s a good idea to start checking on your pension plans about 12 months before you plan to retire. If you have problems tracking any down, the Pensions Tracing Service should be able to help.
Once you’ve gathered this information - around six months before your retirement date - you should talk to an expert annuities adviser. At LV= our advisers will be able to discuss your circumstances and retirement needs and advise you of the best course of action.
You should also receive an information booklet about your State Pension rights at least 4 months before you reach retirement age.
Then about a month before you retire, if you’ve decided which LV= option to take, just tell your dedicated adviser. We’ll do the rest. We’ll fill in all the forms and complete all the paperwork for you, so all you have to do is sign for the annuity that’s best for you.
HOW DO I GET AN ANNUITY?
If you decide to accept the offer made by your pension provider, you simply have to sign your name to the form. It may seem the easiest option but it doesn’t necessarily mean it's the best for you.
If you shop around and choose an LV= annuity, it’s just as simple. You’ll have a single contact from start to finish who you can call at any time with any questions – someone who will get to know your circumstances well enough to be able to give you sound advice.
Your LV= annuity adviser will:
- collate all the details of your pension plans
- arrange for the transfer of funds if needed
- talk you through application forms and health questionnaires to make sure there are no problems
- complete all the paperwork.
All you have to do is sign your name to the form.
Remember, your decision will affect your income for the rest of your life so it is worth taking the time to get the best product and income for your needs.
We offer a range of the protection, pension, annuity and investment products from the Liverpool Victoria group of companies. We also offer annuities and investments from a limited number of other companies
WHAT IF I CAN’T DECIDE?
You may be able to opt for a ‘drawdown pension’ instead of an annuity – although very few occupational schemes offer them.
A 'drawdown pension' lets you take an income from your pension fund which will continue to be invested until you buy an annuity. If you’re in a company scheme which doesn’t offer ‘drawdown’ you could consider switching to a personal pension.
Alternatively you could consider a Protected Retirement Plan, which pays an income for a set period (which you decide) but protects the balance of your capital as a lump sum which you can then choose an income for at a later date.
CAN I CARRY ON PAYING INTO MY PENSION?
Once you have taken an annuity you can no longer pay into your pension plan - although, if you have more than one plan, you may be able to continue paying into one that is still running.
If you have an occupational pension you’ll only be able to pay into it as long as you are employed by the company. If you decide not to take your pension when you originally intended you can leave it invested. This could increase its value when do come to take an annuity.
If you are still currently paying into a private pension you could also continue to make contributions until you are ready.
The best way to decide is to discuss your options with an LV= annuities adviser.