Report

Think IFA extended financial report

Pension Annuities

Introduction
How is the value of a pension annuity calculated?
Types of pension annuity
The benefits of a pension annuity
Choosing the right pension annuity for you
Compare pension annuities today

Important !

This article is for guidance/informative purposes only and should not be taken as financial advice. As always, if you are ever unsure towards any financial service or product then please speak with an independent financial adviser.


Introduction

Pension annuities from Thhink IFA

Enjoy your retirement by comparing pension annuities with Think IFA and help maximise your retirement income.

A pension annuity is a financial product which converts a lump sum of capital into a regular income at the age of retirement.

By paying into a pension throughout your working life, you will build up a lump sum of capital which will become your pension fund. At the point of your retirement, this lump sum will then be used to purchase an annuity which will provide a regular income for you for the rest of your life.

Using the same philosophy as an insurance policy, a pension annuity is a way of saving now to ensure that you have the financial protection you require when you retire.

Fixed vs. Variable Pension Annuities

When trying to identify the best pension annuity for yourself, one of the first choices is going to be between a fixed or variable income.

As with any decision which compares fixed vs. variable returns, the most important consideration is your own personal requirements.

If you are going to depend on your annuity to provide your only source of income and you need that payment to provide a certain amount every month, then a fixed annuity may be a more favourable option.

“If you are going to depend on your annuity to provide your only source of income and you need that payment to provide a certain amount every month, then a fixed annuity may be a more favourable option”

Traditionally a fixed sum will be calculated on a percentage return of your overall annuity value whereas a variable return is more likely to be based on the performance of the market where the funds have been invested.

However if you are in a position to be able to risk the exact level of your payment each month in exchange for the possibility of a greater rates of return then a variable rate may be more appealing to you.

Joint vs. Single Pension Annuity

As with many financial products, a pension annuity can be taken out in a single name or that of a couple. Though a single pension annuity will usually pay out a higher rate than joint cover, most products of this type will stop when the holder dies.

In the case of the joint annuity, though the income paid may be lower, the product will continue to run to term whether or not one of the holders dies in the process. This means the remaining partner can still enjoy a proportion of the annuity and has the financial support they need after their loved one has passed away.

How is the Value of a Pension Annuity Calculated?

The value of the regular income payments made by your annuity will be calculated based on your own personal circumstances.

The annuity provider will take into consideration the value of the fund you have built, your life expectancy and the value of any lump sum you have deducted from your insurance fund.

Remember up to 25% of your pension fund can be drawn as a lump sum when you retire. And though this is ideal for those that want to pay off debts, go on the holiday of a lifetime, or make other financial investments, withdrawing such a large amount does significantly reduce the value of your annuity and therefore the level of payments that will be made from it.

Calculating a pension annuity

There are many different factors taken into consideration when calculating a pension annuity

Those with a shorter life expectancy are likely to be offered a higher regular payment as it is considered that less payments will be made. However, those with a healthy lifestyle who retire early can expect their annuity premiums to be significantly lower.

In the same way, men are usually offered a higher level of annuity than their female counterparts as their life expectancy is less. However the overriding impact on the value of the annuity will be the current financial market.

Annuity providers will invest your money in a range of products to achieve the level of return required to pay your regular income and the value of the annuity will depend on the buoyancy of the market at the time of purchase.

When rates are high, the level of annuity offered is usually much higher. When rates are low the level of regular payments you can expect may be significantly less.

Types of Pension Annuity

Value Protected Pension Annuities:

“if the holder dies before their 75th birthday then the outstanding value of the annuity, less tax, will be turned over to their estate

Usually when an annuity holder dies their annuity will die with them. However, in terms of the value protected annuity, if the holder dies before their 75th birthday then the outstanding value of the annuity, less tax, will be turned over to their estate and form part of the assets they can leave behind.

This is particularly attractive to individuals who purchase their annuity later in life, for those that are concerned they will die before they have taken full advantage of the level of investment made, or those that want to put assurances into place to guarantee someone can take advantage of the money they have saved.

Pension Annuities with Guaranteed Periods:

In the same way a Valued Protected Annuity provides a value after the holder has died, a pension annuity with a guaranteed period will continue to provide an income to the estate if the holder of the policy dies during the term of the guarantee.

This ensures that the beneficiaries of the estate will to be able to release a proportion of the value of the investment made, even if the holder of the annuity is no longer alive to do it themselves.

Escalation Pension Annuities:

A standard annuity is designed to provide a fixed level of income during the term of the product.

However in the case of the Escalation Pension Annuity, the level of income will increase in accordance with the initial terms of the agreement.

These will appeal to people concerned that the real value of their income will diminish due to the increasing cost of living and inflation.

However the benefit of such a product must be balanced with the cost of the annuity in the first place which has to be set at the appropriate level to ensure the future value of the income does remain positive.

Enhanced Pension Annuity:

All annuities are based on the life expectancy of the holder and for those with a shorter than average life expectancy, the enhance annuity can be a positive solution.

“All annuities are based on the life expectancy of the holder”

The enhanced annuity offers people with a shorter life expectancy due to their more risky lifestyle the opportunity to use up their pension fund more quickly by increasing the value of the regular income payments made.

In this way the value of the annuity decreases at a much faster rate but does allow the holder to unlock a greater level of cash from their annuity than would be possible under a standard policy.

Such annuities are actually available to a greater number such as smokers, those that are obese and can even cover partners of such applicants when a joint policy is taken out.

Impaired Life Pension Annuities:

The Impaired Life Annuity works in the same way as the enhanced annuity, providing the ability to drain their annuity at a much quicker rate for holders who have health issues.

To qualify for such a policy a medial examination is required and more intricate application forms will need to be completed.

However, for someone who has built up a significant pension fund throughout their lives, only to worry about whether they will be around to enjoy the benefits, such a policy could potentially be advantageous over traditional products.

With-Profits Pension Annuities:

A with-profits pension annuity is a variable product which invests your capital in the ever volatile stock market. This makes it is possible to take advantage of extreme hikes in growth of the identified stocks, but you must also be prepared to deal with the lows.

'with profits' pension annuities from Think IFAEach annuity should provide an anticipated bonus rate (ABR) to indicate the level of performance expected but this is simply a guideline as to the return they would anticipate being able to offer and is no guarantee.

With this type of investment linked annuity, it is usual for the provider to even out the payments made over time so that there is a level of stability for the holder. In buoyant periods, some of the income earned may be held back and then used to compensate for much lower returns in harsher times. This reduces the gap between good and bad years and provides a certain level of consistency to the product but the return provided can still vary significantly.

For an added level of security, it is possible to opt for a with-profits pension annuity that provides a minimum level of income or, choose an annuity with a higher level of ABR than you actually require. However such benefits have to be balanced with the price of the overall product in the first place to find the right investment for you.

Unit Linked Pension Annuities:

Though still an investment linked annuity, rather than investing directly in the stock market a unit linked pension annuity will invest in unit linked pension funds which perform in exactly the same way as standard unit trusts.

This provides a wider opportunity for investment and spreads the value of the capital over a more diverse range of products. However, whilst this diversity may reduce the level of risk associated with such a product, the reduction in investment risk also comes with a reduction in the opportunity to take advantage of greater returns.

Furthermore, the income from unit linked pension annuities is not traditionally smoothed out in the same way as the with-profits pension annuity. The holder must therefore be prepared to accept significant peaks and troughs in the regular income payments which come from such an investment.

The Benefits of a Pension Annuity

There are two key benefits to a pension annuity – tax relief and financial security.

Tax Relief:

Just as a pension fund grows with tax benefits from the Government, the pension annuity also provides further advantages to tax payers.

Tax relief on a pension annuity

Only income tax is payable on a pension annuity and only if your income exceeds the annual allowance.

All growth that occurs within the annuity is deferred which means that your entire capital is never eroded by capital gains tax or any other type of penalty during the life of your fund.

Furthermore, there is no limit to the amount of money you can pay into an annuity before incurring tax charges.

This means, that for those that have left it late to start saving for their retirement, it is still possible to create the level of capital required for a secure future with the same tax advantages.

In fact, the only tax you will pay on an annuity is standard income tax on each of your payments as you withdraw them. And only then if the value of your income exceeds the minimum tax free income allowance in any given year.

Further information about tax on retirement annuities can be found on the HMRC website here: http://www.hmrc.gov.uk/pensioners/pension-retirement.htm

Financial Security:

The pension annuity is guaranteed to continue to provide you with an income no matter how long you live (dependent upon which type of annuity is chosen). Though there are average calculations of life expectancy, it doesn’t matter whether you exceed them by a few months or several decades, most annuities will continue to pay out during your life. This provides a reliable source of income so that holders do not have to worry about how they are going to cope financially through retirement.

Choosing the Right Pension Annuity for You

The key to finding the best pension annuities is to shop around using the open market option.

No two annuities are ever the same and the rate or return they offer can also differ significantly.

“The key to finding the best annuity is to shop around using the open market option

Though you may have been saving your pension with the same company for your entire working life, you are under no obligation to use this company to purchase your annuity and alternative company may provide a much better solution.

By using a independent financial adviser, they will be able to guide you through choosing a suitable annuity and should be able compare the most suitable annuities by using the open market option so it is essential to get the best advice you can even if you have never taken financial advice before.

A financial adviser will be able to discuss your current and future financial needs with you and assess whether you would be eligible for a more specialised annuity that could provide a greater rate of return.

They will also be able to provide you with access to a greater range of products and help you compare the offers that are available so that you are more likely to achieve the return you require.

By starting your research early and taking your time to consider all the options available to you, you could potentially achieve much greater returns on your investment and provide a much healthier financial future for your retirement years.

Compare Pension Annuities Today!

Compare pension annuities with Think IFAWith over £2000 Billion worth of assets held within UK pension funds in 2011(source: Office for national statistics), competition between annuity providers is very high.

This is why it is important to compare providers to try and achieve the best possible income for your retirement.

For full and easy to understand independent advice on pension annuities contact an independent financial adviser.

To speak with an independent financial adviser please fill in the annuity comparison form below.

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Further resources:
http://www.bbc.co.uk/news/business-19268152