When it comes to setting up a form of income for your retirement, many people want a safe and consistent option. Some people want to steer clear of investment related products because of the risk involved, while others are quite happy with what they might get from a conventional pension annuity. Some of us simply like to keep things simple and uncomplicated, and like to know what is coming from one month to the next. A guaranteed annuity is a product which will give someone a predictable and regular income for the rest of their life after they stop working.
Anyone who has built up a pension fund with a provider over a period of time will need to decide what they want to do with it as they approach retirement. A firm which has supplied them with this pension fund mechanism will contact them offering them a pensions annuity. This is a type of product which involves swapping your pension fund for an income during retirement. So for example, someone with a £90,000 fund might exchange this for an annuity which provides them with £8,000 a year.
Thanks to what is known as the open market option, someone is not obliged to go with the same firm which has provided their fund when it comes to choosing an annuity. Some people do not realise this and therefore miss out on thousands of pounds worth of extra income. The deal which is offered to you by the company which supplied your fund may not be the best value. The market is broad and rates change regularly, meaning there may well be a better product out there somewhere.
Annuities do not need to be fixed, and can be linked to investments. This type of product is selected by people who want to maximise their income, but because stocks and shares can go up and down, they may end up with less than they bargained for. A guaranteed annuity ensures the annuitant gets regular payments for a minimum length of time even if they die during that period. If someone were to survive past the agreed period, payments will then continue. Essentially this type of product ensures you get a regular income for the rest of your retirement, regardless of how long you live for.
The main benefit of this type of product is that it is, as the name suggests, guaranteed. You do not need to worry about investments in stocks and shares going up and down. You have made a straightforward exchange which means you can expect the same level of cash. There is no need to worry about this suddenly running out one day, leaving you with nothing.
The downside to a guaranteed annuity is that it is extremely inflexible. All products of this type are irreversible, meaning you cannot switch to a new annuity when you please, and a fixed product of this type means you will never get more than what has been agreed. This has implications if your circumstances change in future. An independent financial adviser can help you choose what is best for you, even if you are thinking of simply going for the safe option.
Steve Wright is Managing Director of YourPensionAnnuity.com an independent financial adviser specialising in retirement advice and guaranteed annuity