Prudential Annuities


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Prudential Annuities

  1. 1. YOUR HANDY GUIDE TO UNDERSTANDING PENSION ANNUITIES How to turn your pension fund into an income – for life
  2. 2. Before you can draw your pension, there are some things you need to know.
  3. 3. Many people think that when they retire, their pension fund will automatically start paying them a well deserved income. However, the truth is that when you reach retirement age, you will have to decide how to convert your pension fund into a regular income. This handy guide from Prudential is all about annuity options. It will show you how you can use your pension fund to buy an annuity that will give you an income for life – no matter how long you live. There are many different types of annuities, all with their own pros and cons. We’ll show you what your choices are, so you can start to think about which one will be best for you when the time comes. That way you’ll be able to make an informed decision in order to secure a comfortable income in retirement. And if you have any questions, we’re always here to help. 3
  4. 4. YOUR WAY ANNUITIES EXPLAINED Page AROUND THE GUIDE 1 What is a pension annuity and 6 why should you buy one? 2 Why an annuity makes sense 7 THINGS TO CONSIDER Page 3 The effect of inflation on your 8 retirement income 4 If you have more than one pension 9 Information in this handy guide is based on our understanding of 5 A tax-free cash lump sum 10 current taxation, legislation and HM Revenue & Customs practice, as at 6 How your partner, health and other 11 June 2007, all of which are liable to factors can influence your decision change without notice. The impact 7 How much will you actually need 12 of taxation (and tax relief) depends in retirement? on individual circumstances. 4
  5. 5. MAKING YOUR DECISION AND FINALLY Page 8 Types of annuity 14 Index of key terms 26 9 Find out where you currently stand 18 10 Key steps to taking your 20 pension income 11 It could pay to top up your pension 22 TAKING ACTION Page 12 What to do now 25 5
  6. 6. 1 WHAT IS A PENSION ANNUITY AND WHY ANNUITIES EXPLAINED SHOULD YOU BUY ONE? When you pay money into a pension during your WHEN YOU CAN START TAKING PENSION INCOME working life, you build up a fund. If you have a Many schemes let you take your pension income any ‘Defined Benefit’ or ‘Final Salary Pension Scheme’, time between ages 50 and 75. However, new pension your fund will automatically begin to pay you a rules, due to come into effect on 6 April 2010, will regular pension when you retire. increase the minimum age to 55. If, like many people, you have another sort of When you first took out your personal pension plan or scheme (usually called a ‘Defined Contribution retirement fund, you probably nominated a specific Scheme’) then a few weeks before you retire you retirement age. If so, it’s unlikely you would will have to decide how best to use your pension be held to that. But if you’re retiring early, fund to provide you with a regular income. Of check that it won’t cost you anything the options available, the most popular choice as some older pensions have penalty by far is to buy an annuity. This guide helps you clauses. understand your annuity options. An annuity is a form of insurance which guarantees to pay you an income for life – no matter how long you may live. So you need never worry about your income drying up. This makes it safe and secure and gives you peace of mind. 6
  7. 7. 39,000 predicted 2 WHY AN ANNUITY MAKES SENSE ANNUITIES EXPLAINED No-one knows what the future holds, which can make it difficult to plan ahead. However, people are living THE GROWTH IN longer and enjoying a more active retirement. Which is THE NUMBER OF why an annuity is so attractive because it guarantees to CENTENARIANS pay a regular income, no matter how long you live. So IN THE UK** UK even if you live to be 105 you can rest assured that the money will keep coming in. over Statistics show that 18% of today’s 65-year old men 6,000 and 31% of today’s 65-year old women will live under into their 90s* In the 1960s there were fewer than . 300 300 centenarians, yet in 2004 there were more than 1960s 2004 2036 6,000 people over 100 years old in England and Wales, and by 2036 this number is predicted to increase to *Source: **Source: Economic and Social 39,000**. Good news, bad news: Majority Research Council (ESRC), of retirees underestimate life Swindon, page 32. (Accessed Figures like this demonstrate why securing an income expectancy, October 2006. 16 January 2007). Stewart, I. for life is vital. Annuities can provide the security of an and R. Vaitilingam (eds) (2004) Seven Ages of Man and income for life. All you have to do is choose the right Woman: A Look at Life in Britain annuity to suit your individual circumstances. in the Second Elizabethan Era. PRUDENTIAL ANNUITIES 0845 073 4000 7
  8. 8. 3 THE EFFECT OF INFLATION ON YOUR THINGS TO CONSIDER RETIREMENT INCOME The cost of living in retirement is higher than you may think. In the early years you will almost certainly take up new hobbies or devote more time to old ones. You may also want to travel more, and visit friends and relatives abroad. Then as you get older and start spending more time at home, you may find that your utility bills rise. The increased cost of living, combined with the fact that you can expect to enjoy an average of 22 years in retirement, means that an annuity that has the potential to increase your income over the years may be most suitable. Even if the Bank of England achieves its 2% inflation target, £1,000 in today’s money will be worth only £647 in 22 years’ time. The good news is that with an annuity you have various options that can make sure your retirement income increases in line with inflation. We’ll explain these in more detail later on. 8
  9. 9. 4 IF YOU HAVE MORE THAN ONE PENSION THINGS TO CONSIDER Over the years you may have worked for a few different companies and paid into more than one pension with different providers. In this case you may want to combine your total fund value into one annuity. ANNUITIES ARE BELIEVED TO DATE BACK TO This could maximise your potential income, as some ROMAN TIMES types of annuity require you to invest a minimum Annuities have been around for total fund value. However, you will need to some 2000 years and began in check each pension you have to see if this ancient Rome*. Outside the state is possible – and financially beneficial. pension, annuities are the most common form of pension income in the UK today**. * Early History of Annuities, Annuity Museum, April 2007 **Source: Winning Strategies, What Investment, March 2006 PRUDENTIAL ANNUITIES 0845 073 4000 9
  10. 10. 5 A TAX-FREE CASH LUMP SUM THINGS TO CONSIDER Normally you can take up to a maximum of 25% of your pension fund as tax-free cash. This means you will receive around 25% less income from your annuity. If the total sum of all the pension funds you hold is Before you start taking an income from your less than £16,000*you can withdraw it all as cash pension fund, you have the option of taking a between the ages of 60-75. However, you must tax-free cash lump sum from it first. withdraw all your funds in a single 12-month period. If you do, you’ll obviously receive less income from your You will be able to take 25% of the total fund as tax-free annuity, but will come away with cash that you can use to cash, while the remainder will be taxed as income. boost your pension income in other ways. For instance, *Correct for tax year 2007/8 you could put your capital into tax-free or tax-efficient savings or investments vehicles. This will give you easy access to your funds for a special treat or for a ‘rainy day’. Meanwhile your tax-efficient funds will continue to gain interest. 10
  11. 11. 6 HOW YOUR PARTNER, HEALTH AND OTHER FACTORS THINGS TO CONSIDER CAN INFLUENCE YOUR DECISION Like many people, you may want to ensure that your partner can continue to benefit from your pension if you die before they do. You can choose an annuity option that will ensure they can – though it means your income will be lower. Or if you suffer from poor health or have a long-term medical condition, you may feel that you will never receive the full benefit of an annuity. However, this is one instance where poor health can actually work in your favour. For instance, Prudential may pay you a higher income if you have a qualifying serious medical condition. So it is important that you highlight this to us. From ill health to inflation, there is an annuity specially designed to meet your needs. PRUDENTIAL ANNUITIES 0845 073 4000 11
  12. 12. 7 HOW MUCH WILL YOU ACTUALLY NEED THINGS TO CONSIDER IN RETIREMENT? Thanks to new found leisure time, you may find yourself MONEY CHECKLIST spending more money than anticipated. Or you may You may want to use the checklist on the page discover that staying at home means higher bills – opposite to help you estimate the amount of especially for gas, electricity and telephone. income you will need. You also need to think about whether you: want to replace any employee-benefits you might lose (e.g. a company car, mobile phone, medical AT insurance, etc.) and how much will it cost N ISN’T UESTIO IRE, “THE Q TO RET may receive extra money in the future (e.g. maturing I WANT WHA T AGE INCO ME” insurance policies, endowments, bonds, investments, WHAT IT’S AT 49) (19 sale of a property or business, inheritances, etc.) n Forema George would be willing to use or dip into your capital (eg. investing it for income, downsizing your home, releasing equity from your home, selling assets, etc.) to supplement your pension income. 12
  13. 13. MONEY CHECKLIST ESTIMATED VALUE OF ASSETS IN RETIREMENT THINGS TO CONSIDER Savings / Investments £ Your home (less mortgage) £ EXPECTED MONTHLY EXPENDITURE Other property / business interests £ Current monthly expenditure £ Potential inheritances £ Total new expenditure once you £ Total wealth (in retirement) £ retire (e.g. extra heating costs, health plan, car expenses, etc.) SOURCES OF INCOME Monthly amounts Less total expenditure that will £ Income from savings or investments £ stop or reduce when you retire (e.g. rail fare, petrol, lunches, etc.) Your private/company pension £ Total per month (in retirement) £ Your partner’s private/company pension £ Basic (old age) state pension £ ONE-OFF EXPENSES IN RETIREMENT Additional state pension or other state £ Total required for one-off expenses £ pension or pension income (eg. replacing a company car, planning Earned income from post-retirement work £ the trip of a lifetime, installing a new kitchen or bathroom, moving home, etc.) Income from equity released from £ You may have some tax-free cash your home from your pension that you could use Other income (eg. rental, property/trusts) £ Total expected income £ PRUDENTIAL ANNUITIES 0845 073 4000 13
  14. 14. 8 TYPES OF ANNUITY MAKING YOUR DECISION There are many types of annuity and pension income options to consider, and on the following pages you will find an overview of the main ones. Whether or not your current pension provider offers you an annuity at retirement, remember that you’re free to shop around for the most appropriate solution. So just before you retire, make sure you ask the Prudential or your Financial Adviser for more information so you fully understand all your options. You can also get more information at ONCE YOU KNOW YOUR ANNUITY OPTIONS It’s important to understand that once you have bought an annuity you can’t change your mind, so you need to be sure you’ve made the right decision. 14
  15. 15. 8 MAKING YOUR DECISION TYPES OF ANNUITY continued B CONVENTIONAL ANNUITY WITH INCREASING INCOME As its name suggests, this option allows you to A CONVENTIONAL ANNUITY WITH choose an income that will increase over the years. LEVEL INCOME The amount of the increase can be set at a fixed percentage each year, or linked to inflation. This basic type of annuity guarantees to pay you an income for life. It also guarantees the amount it ADVANTAGES: will pay. The income will be fixed from the start Guaranteed income that will increase in line and will not change until you die. with the Retail Price Index (RPI), or by the fixed rate chosen. ADVANTAGES: Guaranteed income that will stay the same. DISADVANTAGES: Lower starting income than Level and DISADVANTAGES: With-Profits annuities. The purchasing power of your pension income If you choose a fixed percentage increase, will be eroded by inflation over time. your income might become eroded by inflation No possibility of increases in income. over time. Once selected, it cannot be changed. Once selected, it cannot be changed. If you choose to fix it with the RPI, and inflation is negative, your income will go down. PRUDENTIAL ANNUITIES 0845 073 4000 15
  16. 16. 8 MAKING YOUR DECISION TYPES OF ANNUITY continued C WITH-PROFITS ANNUITIES ADVANTAGES: A With-Profits annuity can be arranged to produce Guaranteed minimum income. a similar income as a Conventional Level annuity. Potential for increases in income, based on If investments are poor, your income may fall. fund performance. However, it will never fall below a guaranteed, Potential to keep pace with or even outpace minimum level. So With-Profits annuities involve an inflation. element of risk – and potential reward. Some (like the Prudential With-Profits annuity) allow you to convert to a Level or Increasing Your choice of starting income will determine the Income Conventional annuity if you change level of risk you are taking – the lower the income, your mind. the less risk there is. Conversely, the higher the income the more risk there is that your income DISADVANTAGES: could reduce in the future. Your income can reduce in years of poor fund performance, although not below a minimum guaranteed income level. 16
  17. 17. 8 MAKING YOUR DECISION TYPES OF ANNUITY continued D UNIT-LINKED ANNUITY ADVANTAGES: Here you can choose to link your retirement Potential for increases in income, based on income to the value of an underlying investment fund performance. fund. The fund can be low, medium or high risk Potential to keep pace with or even outpace (depending on the offering of the provider). inflation. Some allow you to convert to a Level or Usually the more risky the underlying fund, the more Increasing Income Conventional annuity if your retirement income may increase – or decrease. you change your mind. Also, most Unit-Linked annuities do not come with a minimum income guarantee. DISADVANTAGES: Income can fall. Often there is no minimum guarantee. Highest risk annuity option – entirely dependant on investment returns. PRUDENTIAL ANNUITIES 0845 073 4000 17
  18. 18. 9 FIND OUT WHERE YOU CURRENTLY STAND MAKING YOUR DECISION When pulling detailed figures together we suggest that you (and your partner, if appropriate) get STATE PENSIONS AND BENEFITS up to date valuations for all your: You can find out about these on the Department for Work and Pensions’ website private or company pensions The Government is setting up pension centres state pensions and benefits round the country to help retired people. savings and investments (both their capital value To see if there’s one near you, visit and average yearly income/interest) loans, mortgages, credit cards and other debts. LITTLE OR NO PENSION IS If you have low pension income, you could be eligible AT 65 EMENT 65 for pension credit or other state benefits. To find out “RETIR I WAS WHEN LOUS. ” about these, contact your local pension centre or social RIDICU IMPLES HAD P I STILL 96) 96-19 security office, or visit 8 Burns (1 where you can search for local sources of help. George 18
  19. 19. 9 MAKING YOUR DECISION FIND OUT WHERE YOU CURRENTLY STAND continued DIVORCE AND YOUR PENSION LOST TRACK OF ANY PENSIONS? When couples split up, division of their pensions is If you’ve lost touch with your pension provider, usually decided at the time of the divorce. This it’s important to make contact and let them know where you are. used to be called pension splitting but is now known as pension sharing. If you don’t know how to trace them, the Pension Schemes Registry may be able to help. Alternatively, pensions can be earmarked for division Call 0845 6002 687 or visit at retirement. If this applies to you, remember to take it into account and let your current and new provider know – as it will affect your annuity quotes. “I’M LIV ING SO MY INC FAR BE OME T YOND ALMOS HAT W T BE S E MAY AID TO LIVING BE APART E E Cumm ” ings (18 94-1962 ) PRUDENTIAL ANNUITIES 0845 073 4000 19
  20. 20. 10 KEY STEPS TO TAKING YOUR PENSION INCOME MAKING YOUR DECISION The following timetable and checklist will help TIMETABLE OF EVENTS make sure you get the pension income that best As the time draws closer to retirement, you can check meets your needs. with your pension provider and/or chosen annuity provider to see how long things will take. Until then, these approximate timings may help you draw up a plan of action. 12 MONTHS 3-6 MONTHS 8-10 WEEKS OR MORE BEFORE BEFORE BEFORE You should start thinking Get all your paperwork By now you should have This will allow you to see about what life will be like together and start looking a reasonable idea of what clearly what your options when you’ve retired. at what options are your options are. Make are and how much you Consider topping up your available to you. You may sure you ask for a number could get, both today and pension and preparing want to ask your pension of different annuity in future years. Decide for retirement (see page 22). provider for a valuation – scenarios, such as With- which options best meet but bear in mind that this Profits, Fixed Income, your needs, then call is likely to change by the Rising Income, Joint and Prudential to discuss your time you actually retire. Single Life policies. choices and ask for a quote. 20
  21. 21. 10 MAKING YOUR DECISION KEY STEPS TO TAKING YOUR PENSION INCOME continued If your needs change or you change your mind, All being well, though, and with help from Prudential there may still be time to back out. Normally the or advice from your Financial Adviser, you’ll have cancellation period is 30 days from the quote being the confidence to start enjoying your pension income issued, but some companies (at their discretion and right on cue. depending on how far on your application has progressed) may allow you to cancel right up to the last minute. 4-8 WEEKS 2-3 WEEKS IN THE FINAL BEFORE BEFORE RUN UP You may also want to speak If you’re moving pensions Armed with all the It normally takes several to a Financial Adviser. from different sources, information you need, weeks between applying Narrow down your options you need to apply 4-8 you’re now in the position for your chosen quote and to a shortlist. weeks in advance of your to make your final decision. your pension being actual retirement date. converted into pension Ask Prudential if you need income. So make sure you help in understanding have access to funds to anything so you can make cover any possible gap your final decisions. in income. PRUDENTIAL ANNUITIES 0845 073 4000 21
  22. 22. 11 IT COULD PAY TO TOP UP YOUR PENSION MAKING YOUR DECISION WISH YOU’D PAID MORE INTO YOUR PENSION? If you can afford to top up your pension before you take your pension income, this may be to your advantage. Paying in extra money is not only tax-efficient, but it can help boost your pension income. Most pension companies will accept additional lump sums or contribution increases so it is well worth investigating. But before doing anything, make sure the pension income you would receive outweighs any charges you may have to pay to top up. VE ACHIE NT TO “I DO N’T WA G H MY THROU TALITY CHIEV E IMMOR T TO A , I WAN G H WORK THROU TALITY IMMOR YING” NOT D 9 35) Allen (1 Woody 22
  23. 23. MAKING YOUR DECISION THE TABLE BELOW SHOWS HOW PAYING INTO A PENSION HAS TAX BENEFITS* Your contribution The annual allowance restricts your contributions to For a contribution of £1,000 £5,000 all pension schemes to £225,000 (tax year 07/08), and if your net contributions exceed this, there will be a tax charge. You must pay 40% tax on any contributions over this Annual Allowance. Tax benefits When you pay money into your pension, The taxman adds £282 £1,411 HM Revenue & Customs invests an additional 28.2% on your behalf. If you’re a higher rate Higher rate tax payers can apply for up to an taxpayer, you can also up to up to additional 18% tax relief when they fill in their £180 £1,154 claim back self-assessment return. The Government has introduced an Annual Allowance. The above is based on our understanding, as at June This applies to the value of your total pension 2007, of current taxation, legislation and HM Revenue contributions each year to all pension plans. The & Customs practice, all of which are liable to change allowance is £215,000 for 2006/07 (increasing for at without notice. The impact of taxation (and any tax least the following 4 years). If the total of your pension relief) depends on individual circumstances. contributions is in excess of this Annual Allowance you will receive a special tax charge, called the Annual *This applies to personal and stakeholder pension only Allowance charge, of 40% on the excess amount. and not to occupational schemes. PRUDENTIAL ANNUITIES 0845 073 4000 23
  24. 24. NOTES Should you need to make some notes – when you talk to us, for instance – these pages might be just the place. 24
  25. 25. 12 WHAT TO DO NOW TAKING ACTION Contact us for help and information about Prudential representatives can only provide Prudential Annuities. information on Prudential products. To contact us you can: call 0845 073 4000*between 9am and 7pm, Monday to Friday and between 9am and 1pm on Saturdays. visit us 24 hours a day at Existing Prudential customers can: email us via PruMail – our secure email system – if you wish to contact us about an existing policy. Log on to for more information. *Calls may be monitored or recorded for quality and security purposes. 25
  26. 26. INDEX OF KEY TERMS AND FINALLY Cancellation period See page 21 Personal pension See page 6 Company pension See page 13 Pension fund See pages 3, 6, 10 Conventional annuity See page 15, 16, 17 Pension income See pages 6, 9, 10, 12, 13, 14, 15, 18, 20-21, 22 Converting into pension income See page 21 Pension sharing (Pension splitting) See page 19 Defined Benefit or Final Salary Pension Scheme See page 6 Pension valuations See pages 18, 20 Defined Contribution Scheme See page 6 Retail Price Index See page 15 Drawing your pension See page 2 Retirement See pages 3, (7), 8, 12, (13), 14, (18), 19, (20), 21 Earmarked for division See page 19 Retirement age See pages 3, 6 Employee-benefits See page 12 Retirement fund See page 6 Fixed (level) income See page 15, 20 Retirement income See pages 8,17 Joint life See page 20 Rising income See page 20 26
  27. 27. AND FINALLY INDEX OF KEY TERMS continued Single life See page 20 “YOU C Stakeholder pension See page 23 AN’T H OLDER ELP GE , BUT Y TTING State pension See pages 9, 13, 18 OU DO HAVE N’T TO GET Ge OLD” Tax-free cash lump sum See pages 10,13 orge Bu rns (189 6-1996) Topping up your pension See pages 22-23 Unit-Linked annuity See page 17 With-Profits annuity See page 6, 16 PRUDENTIAL ANNUITIES 0845 0734 000 27
  28. 28. "Prudential" is a trading name of The Prudential Assurance Company Limited, which is registered in England and Wales. This name is also used by other companies within the Prudential Group, which between them provide a range of financial products including life assurance, pensions, savings and investment products. Registered Office at Laurence Pountney Hill, London EC4R 0HH. Registered number 15454. Authorised and regulated by the Financial Services Authority.