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What You Should Know About the Pension Annuity Market


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As most people start working when they are fresh out of university or college, or even earlier, it is no surprise that they can have a lack of understanding when it comes to pensions. Some people may find that their knowledge hardly improves over the years, even to the point where they still know comparatively little as the retirement date approaches. The important thing to remember is that pension money must to be turned into a regular income to be drawn on after you have put your feet up. This will involve buying a pension annuity, and exchanging a pension reserve for a financial product which will supply the retiree with regular payments to live off.

It is not safe to assume this will somehow be done for you without your input, and getting the right deal for you is crucial if you are looking for a safe and stress-free retirement. Making the right decision is important because most forms of pension annuity are irreversible once they have been chosen, meaning you cannot simply switch to a new product further down the line.

The earliest age at which someone can take retirement benefits is 50, and this will rise to 55 in 2010. A common option is for someone to choose what is known as a lifetime pension annuity, which takes their cash and provides them with a plan to supply them with a regular flow of payments until their death. Although this is not the only option, it is normally a type of product which cannot be changed.

At the other end of the scale, the law says that anyone who has created a pension fund has to turn it into an annuity before they reach the age of 75. But you do not have to make a decision if you do not want to until just before this, and are perfectly entitled not to buy one until that age.

People looking for a more risky annuity, with the possibility of greater rewards, can go for something linked to investments. Of course, the likes of stocks and shares can go down as well as up meaning someone may eventually be left with less than they bargained for. What you decide on will be influenced partly by your own personality - there are safe and secure options, and there are the ones carrying slightly more daring elements.

It is wrong to assume that whoever has administered your fund while you're working must then provide you with an annuity. You are perfectly entitled to look at products offered by other providers, and this right is known as the open market option.

To give an example of some of the common options, a conventional annuity will involve no investment risk, and provide someone with an income regardless of what happens with various markets.

Enhanced and impaired annuities offer higher cash levels than conventional annuities and are a possibility for people who suffer from medical conditions. There are also investment pension annuities, carrying different levels of risk and linked directly to a number of investments.

All the options can be baffling, and the expert advice of an independent financial adviser could help someone to identify which pension annuity best suits their own circumstances.

Steve Wright is Managing Director of an independent financial adviser specialising in retirement income advice and pension annuity


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