The majority of UK retirees take their income via an annuity. However, that doesn't necessarily mean it is always the best approach, and since it is such a big decision it is worth looking into in rather more detail.
So what is an Annuity? A lifetime annuity (to give it its full name) converts your pension fund into pension income. How much income you receive for a given level of pension fund depends on the options chosen and the annuity rate you get.
Annuities are only relevant to a "Defined Contribution" (or "Money Purchase") pension plan where a sum of money is built up over time, and do not apply to a "Defined Benefit" scheme (such as a final salary scheme or public sector pension), where your pension income is paid out of the pension scheme.
To help illustrate what an annuity is, here are some advantages and disadvantages:
Advantages
- You receive a guaranteed income for life
- You may have an option to guarantee an income for a spouse / civil partner
- Income could be set up to increase with inflation
- Additional income may be available if lifestyle or health issues indicate that you may have a shorter life expectancy than average
- The annuity could be investment-linked which provides some potential for investment growth
Disadvantages
- Decisions are taken at outset and cannot be changed later
- The income is fixed
- If you die soon after starting an annuity your estate would lose that capital (although you could choose an option to have the income continue until the end of 5 or 10 years)
The guaranteed / fixed aspect of annuities is the big factor - they are like two sides of the same coin - it's both an advantage and a disadvantage, so one approach might be to take some of your income from an annuity - giving you a basic income which would last for life - while other income options are used to give you some flexibility. Whether that is realistic would depend on the size of your pension fund which is available; if you have only built up £10,000 or £20,000 then it would not be realistic to split it.
Peter Lawrence is an Independent Financial Adviser with Prime Time Financial based in Fleet, Hampshire. He specialises in advising over-50s on all aspects of finances including retirement planning, investments, equity release, and estate planning (Inheritance Tax). Keep your finances in good shape - sign up for our email newsletter at http://www.primetimefinancial.co.uk.
Prime Time Financial is a trading style of Keystone Financial Ltd which is authorised and regulated by the Financial Services Authority.
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