MPL guide to Annuities (2011)


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MPL guide to Annuities (2011)

  1. 1. GUIDE TO ANNUITIES & your options at retirementIt takes many years of planning, saving and sacr to build up a pension – andafter all those years you want to be sure you are making the most of it. Your pension planprovider will be keen to give you a quote for the income that your pension will provide butit would be sensible to take at least a little time considering what to do. Taking the rsto er you get could mean giving up additional income.THIS GUIDE IS DESIGNED TO PROVIDE However, they can be bought by any investorTHE BASIC INFORMATION YOU NEED TO requiring income, with a cash lump sum from HOW IS THE RATESTART INVESTIGATING YOUR RETIREMENT any source. OF INCOMEOPPORTUNITIES. IT CANNOT MAKE ANY DETERMINED?RECOMMENDATIONS OR DECISIONS What are the retirement rules?BUT, ARMED WITH THE INFORMATION Annuity providers rst decide for IT USED TO BE COMPULSORY TO PURCHASEIT PROVIDES, YOU CAN START TO ASK how many years they will have to AN ANNUITY AT RETIREMENT. HOWEVER,QUESTIONS AND, WITH OUR HELP, MAKE provide you with an income. NOW, YOU CAN TAKE A ‘PENSIONSURE YOUR RETIREMENT IS AS LUCRATIVE Therefore, annuity rates are based COMMENCEMENT LUMP SUM’ OF UP TO 25%AS IT CAN BE. on a statistical analysis of how long OF YOUR PENSION FUND AT RETIREMENT AND DEFER YOUR ANNUITY PURCHASE – you are likely to live, given your age,What is an annuity? EVEN AS FAR AS AGE 75 – OR YOU CAN lifestyle and state of health. The rateAN ANNUITY IS A GUARANTEED FIXED DRAW AN INCOME DIRECT FROM YOUR will also depend on current views ofINCOME WHICH YOU BUY WITH A LUMP SUM. FUND INSTEAD. long-term interest ratesITS TERM MAY END EITHER AT A FIXED DATE Alternatively, you can combine annuityIN THE FUTURE, WHEN YOU DIE OR WHEN purchase, deferral and tax free lump sums soANOTHER NAMED PERSON DIES. that you retire in stages over several years. NotThe most common reason for buying an annuity all these options are suitable for everyone andis retirement, when the lump sum which you there are costs and risks associated with each.have built up over the years through a company However this guide provides some basic points,or private scheme is used to buy an annuity and a visit to your professional adviser will helpand thereby provide you with a lifetime income. you look at each in more detail.
  2. 2. BUYINGANANNUITYTHE PROCESSTHE FIRST AND MOST IMPORTANT QUESTION YOUHAVE TO ASK IS WHETHER YOU WANT TO BUY ANANNUITY AT ALL (SEE THE ALTERNATIVES OVERLEAF). WHAT IS Always remember that you cannot change your choice once it is made so it is important to get 1SELECTINGA THE OPEN that decision right. Annuity rates will change according to the interest rate climate. Therefore,PROVIDER if you are buying at a time in the market cycle MARKET when interest rates are particularly low, you may not want to invest your whole retirement fund immediately.We can help you take a lookat the entire market ofannuities and select the Also, when deciding whether or not to buy an annuity, you should bear in mind that there is no OPTION? possibility of from future investment Over the years, you will haveone which is right for you. growth on your fund. In addition, unless you have written in certain guarantees, you will not amassed a retirement fund either be able to pass your annuity income on to your through a company schemeIt can be tempting to simply look for heirs, so if you die earlier than expected, the full or through a private plan.the highest rate but, as mentioned, purchase of an annuity will mean that much ofthe long-term security of the annuity At retirement, the pension provider that fund will be lost.provider should be of greater consideration. will write to you o ering a range ofAre they a well-trusted organisation with annuity options, one of which will capital backing? Do they o er be an ‘open market option’.the alternatives you need at a reasonablerate? Comparison information on annuities This allows you the chance to take youris widely available, so there are no excuses retirement fund to a di erent annuity providerfor not shopping around. than the one with whom you have actually built up your fund. It is now a legal requirement to ensure you are made aware of what your open market option will be.
  3. 3. 2 WHAT TYPE d) Could you accept some investment risk? Investment linked annuities invest your money into stocks and sharesOFANNUITY? on the basis that investment growth could o er the potential for higher income payments in the future without the need for you to buy protection (see b above). There are risks to this approach, however, as your investment might not grow – indeed it might fall. Even if the investment does grow, it may not be in line with what you expect – so either youra) Single life or joint life? income will then have to fall or will be maintained but will eat into theThis will depend on whether you have a partner you need to provide for value of your investment. If that possibility concerns you at all, you shouldafter your death. If you have a single life annuity, the rate of income you stick to conventional annuitiesget will be based on your age and state of health. If you have a joint lifeannuity, it will be based on both of your ages and states of health. If yourpartner is materially younger or healthier than you, you will that the e) Do you want to buy from more than one provider?rate of income available is much lower than it would be for your own Although the income from annuities is guaranteed, retirees still have tosingle life. take a risk on the provider. As the Equitable Life incident demonstrated, no company is 100% safe. That said, changes in legislation following the problems at Equitable Life mean that annuity providers are now betterb) Would you like protection against capitalised, so investors have greater protection than before. However, asThe environment has been benign for a number of years. with any investment portfolio, you may feel more comfortable spreadingHowever, since December 2009, the Consumer Price Index res have your risk across a number of di erent providers, which maybeen above the Government’s target rate of 2%, demonstrating that make other choices easier. For example, you could roof part ofthe potential for increased still exists. Even with at a your income or put a smaller amount into a joint life annuity to providerelatively low rate, a fall of just 2% every year in your disposable income for a dependent.could have an important impact. Protecting your annuity againstwill cost you more in the short-term, but may give you piece of mind inthe long run. f) Do you qualify for an ‘enhanced’ annuity? If you are su ering from a life-shortening condition, such as heart diseasec) Would you like a guarantee period? or cancer, you can get an ‘enhanced’ or ‘impaired life’ annuity. Some lifeHaving saved for years for a decent retirement fund and then bought also provide these annuities for ‘lifestyle choices’ like smoking. Inan annuity, there is the unfortunate possibility that you will die early, general, the term ‘impaired life’ annuity is used where there is a reasonablethe annuity will then end and much of that fund will go to waste. This expectation that the person will die within ve years. An ‘enhanced’encourages some retirees to put o buying an annuity for as long as annuity is for someone whose life expectancy is reduced but not perhapspossible. The alternative is to buy an annuity with a guarantee. This to such an extent.guarantees the income will be paid for a set period even if you die earlier,meaning your heirs will get some
  4. 4. CONTACT WHAT ARE THEUS ALTERNATIVES? a) Deferred annuity purchase Deferring the purchase of an annuity to older At retirement, you would get part of your tax-We hope you found the age might mean the rate of income you can free lump sum, plus a mini-annuity or a mini get increases. If you have the exibility, you drawdown plan, which would use up part of yourinformation in this guide may also be able to choose a more favourable overall fund (up to 25% under current rules).useful and informative. time in the interest rate cycle and from You would then have the option to take more of any growth in your pension pot for longer. Of your tax-free amount and convert more of your course, always be aware that it also means that pension pot to an annuity or drawdown planIf any of the points are of interest, or you your retirement fund can be eroded by poor own needs. as your needs change. Finally, you convert anywould like to discuss your own situation in investment performance, lower interest rates remaining part of your retirement fund to anmore detail, please call us on: or markets or even recalculation of age annuity at age 75. expectations, the risk of which must be weighted0207 831 4711 against the potential gains. c) Other options There are other options such as short term If you defer the purchase of an annuity you annuities and lifetime cash ow products. can arrange an unsecured pension (drawdown) example: the latter is designed to guarantee a scheme for the interim which allows you to certain percentage as an income each year for draw an income direct from your pension fund. life. Investors retain control of the assets and The rest stays invested until you want to use have access to the remaining capital at any it to buy an annuity. Investors can vary the time. To ensure you consider the full range of amount of income, subject to HMRC maximum options, we would suggest you consider getting limits. Those who want to continue working professional advice. could initially draw a smaller pension but increase the amount slowly until retiring fully. Or, take the tax free lump sum but leave taking any income until further down the line. This option is exible but can be expensive so is generally only worth considering if your pension fund is at least £100,000+. b) Phased annuity purchase Phased retirement is really a series of mini retirements which allows you to buy an annuity or draw down income in stages rather than all at once. You decide the level of income you need each year and take that amount from the plan. Clearly, the level of annuity rate will vary as factors like your age and interest rates will change every year, which could ultimately be a or could work against you depending on the environment at the time.This newsletter is intended to provide informationonly and our understanding of legislation atthe time of writing. Before you make any decision,we suggest you take professional advice. * Source:, as at April 2009January 2010