After decades of working life, you are entitled to expect an adequate and reliable pension. But it will not simply fall into your lap and you will need to make decisions before your retirement date arrives. Your pension plan provider will contact you before the final day, laying out a list of options as to what to do with your fund after you stop working. They will normally list pension annuities, effectively different ways of converting the money into a regular income. There are lots of different options, and although the sector can seem intricate and confusing, there are a few basic elements which are easy to understand.
Firstly you will have to make a decision on how to turn your fund into an income. The earliest you can do this is aged 50, although this limit will rise to 55 in 2010. The latest you can leave a decision is aged 75, and you can carry on working up until that date or you can retire and rely on something else until then, but when you hit this age you will have to have decided what to do with the fund you built up while you were working.
Pension annuities come in many shapes and sizes but there are three clear types. Conventional annuities are products which can convert the cash into a predictable and guaranteed income, meaning you will still get an income even if you live longer than the insurance company expects. To give an example, someone with a £100,000 fund might sign a deal on a conventional annuity provider to supply them with £9,000 a year. This will continue not just for nine or 10 years, but longer, all the way up until your death. It does not matter if you live to be 80, 90 or over 100. The insurer will still pay you the income.
Impaired or enhanced annuities are deals which provide higher levels of income but which are only granted to those with significant health concerns. Regular smokers can normally apply for them, and those with a history of diabetes or heart conditions may also qualify. Although the topic might seem morbid, it essentially guarantees a better deal for people who are not expected to live as long as healthier retirees.
Investment linked pension annuities carry a higher level of risk than other types, and are directly linked to the likes of stocks and shares and property. A fund manager will invest the cash across a range of interests, which can go up as well as down. Of course this means you may end up with far more than you would have done with a conventional deal, but at the same time you may end up with less than expected. This type of product is normally taken out by people who have considerable savings or who have something else they can fall back on should their pension not work out.
Pension annuities are still a complicated topic and everyone's circumstances are different. An independent financial adviser can help you choose which might be best for you, and ensure you make the most of your fund and get the retirement you deserve.
Steve Wright is Managing Director of YourPensionAnnuity.com an independent financial adviser specialising in retirement income advice and pension annuities