When then time finally comes to give up work, it is important that you have thought about how you will have an income. To enjoy life to the full, a regular source of cash will be needed, and this is what the pension fund is supposed to supply after all these years. Before you finally do retire, your pension fund provider will contact you to no doubt offer different types of retirement annuity. An annuity is a way of providing someone with a dependable income which will stretch right the way through the rest of their life or for as long as they choose.
This type of product works by the retiree or ‘annuitant’ swapping their pension fund for an annuity supplied to them by a specialist company. You will not have to stick with the same firm which administered your pension fund - UK law now states that you can take what is known as the open market option, leaving you free to choose any annuity from any company that you wish.
To set up a retirement annuity, someone will need to make a single payment to their chosen provider from their pension fund, and their cash will start to arrive normally after around a month. Pension fund holders are also allowed to keep back some of their pension fund and effectively withdraw and enjoy it, this is known as taking tax free cash. The rest will have to go towards purchasing an annuity.
There are different types of annuity, with a conventional fixed annuity involving a steady rate of payments which do not change and are calculated according to how much you deposit and the interest rates at the time of the purchase.
Some people go for what is known as an enhanced or impaired life annuity, these are products geared to supply a superior level of income due to the fact the person is likely to have a shorter lifespan than other people their age. This is normally due to health concerns, like a terminal illness, a history of heart disease, or a smoking habit. To apply for something like this someone will normally be expected to provide a company with details about their medical history, and evidence from a GP will be needed. A medical examination may also need to take place.
Some people have ended up with very healthy retirement incomes because they have gone for annuities linked to investments. This involves giving up a slice of their fund to invest in stocks and shares. A manager will be involved who is employed by a company to select sensible investments. Of course there is a degree of risk involved, as investments can go down as well as up. In the right circumstances they can provide somebody with far more retirement money than they would have expected, but they can also be a disappointment, meaning many people will need something to fall back on just in case.
Anyone considering a retirement annuity could do well to turn to an independent financial adviser. Annuities are irreversible once they have been set up, meaning you cannot simply change provider after a few years. This means choosing the right product and a level of risk, if appropriate, is the key to a long and comfortable retirement.
Steve Wright is Managing Director of YourPensionAnnuity.com an independent financial adviser specialising in retirement advice and retirement annuity