As you head towards retirement, the main thing on your mind is probably taking a well-earned rest, but you will need to be thinking about what to do with your pension. Contrary to what many younger people believe, a pension fund is not simply turned into an income automatically, and decisions have to be made. Your pension fund provider will contact you before you do retire, offering you pensions annuity options. In simple terms, an annuity is a plan which will take your fund and convert it into a regular income for you to live off in your latter years. You do not have to stay with whoever has administered your pension, and are free to choose other companies if you wish.
The decision you make is crucial because in most cases you will not be able to alter your pensions annuity after you have chosen it. You will effectively have the same deal for the rest of your life, and if it proves inadequate or unsuitable you may end up with a lower income than you wanted. Getting the maximum out of your fund is also important because once you have spent the fund on sorting out an annuity, the capital can then not go to a relative after you have died.
Some people go for what is known as a conventional annuity, often seen as the safe option. It provides a completely predictable and stable income right the way through your retirement. So someone with a pension fund of £120,000 might sign with a company providing them with £10,000 per year. In this sense someone can expect to receive the same amount of cash every year, even if they actually live past what the insurer expects.
If you suffer from ill health it might be possible to negotiate an impaired life annuity or enhanced annuity. These are simply deals which can be applied for and deliver a higher income than a conventional annuity. They may be taken out by someone who has a history of diabetes or heart disease. Those who are terminally ill can normally also get one, and regular smokers might also be accepted for one. Essentially you get more because the insurance company expects you to live a shorter amount of time than a more conventionally healthy person.
The third sector of pensions annuity involves those which are linked directly to investments. The main plus point of these is that they can potentially deliver a much higher level of income than you would have got from a more traditional deal. The problem is that because markets go up and down, your income may also be unpredictable, with there being a chance that you may get less venue wanted over time. They are mostly taken out by people with larger pension funds or who have considerable savings to rely on if their product does not work out.
Remember that the open market option means you can choose from a number of providers, and an independent financial adviser may be able to help you identify the best pensions annuity for you.
Steve Wright is Managing Director of YourPensionAnnuity.com an independent financial adviser specialising in retirement income advice and pensions annuity