Your retirement should be the most enjoyable part of your life, free of stress and with a regular income provided by your pension fund. But as you approach the big date, you will need to make some decisions over how that pension fund is used. You will not be able to simply take it over and draw on it as you wish, and you will need to choose a retirement annuity provider. Although this may seem like extra hassle, it is a necessity and could actually help you maximise your retirement income in the long run. Your existing pension fund provider will normally contact you before you do retire, offering you an annuity. This is essentially a scheme which guarantees you an income from your fund after you finally retire.
The earliest someone can do this is aged 50, although this will rise to age 55 in 2010. At the latest, someone will have to choose an annuity provider before they hit 75 by law. You are, however, entitled hold off right up until this date.
Although as previously stated your fund provider will contact you before you retire, you do not have to choose them as your retirement annuity provider. You are entitled to turn down what they propose a look around elsewhere at different companies. This is what is known as the open market option. Taking what is offered to you by your fund provider may not be the best value, say looking around elsewhere could see you end up with a better income in the long run.
For anyone not in the know, an annuity is essentially a financial plan which takes your pension fund and turns it into a regular income for you during your retirement. You can go for a deal which provides you with a predictable but possibly lower level of income, or you can go for something with a bit more of a risk element, involving investment but possibly providing higher payouts.
A conventional annuity is one of the most common versions and involves no investment risk whatsoever. This means irrespective of what happens to different markets, you will still get an income. It is also not connected to the risk of mortality, and your payments will still continue even if you live for a long time, even if you live longer than the insurer statistically expects you to.
Enhanced or impaired annuities are deals which provide higher levels of income and are taken out by people with significant health problems, including terminal illness or diabetes. An investment annuity will be connected to investments, such as stocks and shares, and may provide a high level of income but involve risk. While these things can go up, they can also go down and leave you with far less than you bargained for. Therefore some people only take them if they have significant savings or other contingency plans in place.
To help you choose a retirement annuity an independent financial adviser may be of use as they can help you identify what is best for your personal circumstances.
Steve Wright is Managing Director of YourPensionAnnuity.com an independent financial adviser specialising in retirement income advice and retirement annuity .