Annuities Explained Should I Get an Annuity or Not?

As of 6th April 2011, the government has stopped requiring pension funds to be converted into annuities by the age of 75. An annuity will provide regular income each month of your life and will help keep your standard of living at a reasonable place throughout retirement.

Annuities are purchased upon retirement with the funds in your pension pot if your pension scheme is a money purchase or defined contribution pension. The risk with an annuity is that if you only live for a few years after retirement, the money is lost and your family does not get any of the money as inheritance.

What Do the New Regulations Mean?

With the new regulations, your pension can remain invested, with only a small amount withdrawn each year. Upon your death, a tax of 55% will be taken out of the fund, and then your family will get an inheritance of the rest of your money.

However, there is a risk of the amount falling if the money remains invested, due to poor performance on the markets, and you will be at a point in your life where you are unlikely to be able to replace the money. In addition, if you empty your pension fund, you will have less income as you get older, as opposed to the annuity, which is a guaranteed fixed income for life.

Currently, you are not allowed to withdraw money from your pension until the age of 55, when you can take 25% of the money as a tax-free lump sum, before purchasing an annuity if you plan on getting one.

Have a look at our annuity comparison below for more information on current rates.


What Are The Pros and Cons?

With an annuity, you will not have any inheritance for your family unless you pass on during a “Guarantee period”, which is an annuity option. The amount of income that comes with an annuity depends on your age, health, and other factors. However, most annuities will not allow change.

Speak to an independent financial advisor for more information on annuity rates tailored to your specific requirements. Click here to fill in a annuity enquiry form.

Without an annuity, your family could receive an inheritance after tax, but the amount of income per year depends on your pension fund, is not guaranteed for life, but rather only until the money runs out, and there is a chance of a reduction in the amount, with risks involved with investment. However, you may be able to purchase an annuity later on in life.

The longer you stay alive, the better value the annuity will become. If you are interested in other options, you could purchase an annuity with some of your pension fund, saving the rest for your family, providing an inheritance. If you are worried about a partner or spouse who may not have an income provision in retirement a join annuity is an additional option, which would continue until the death of the second person. It can pay the same amount or a reduced amount after the first partner dies.

It is necessary for consumers to look at their options in saving their own money or creating an annuity, because the differences can be staggering. In addition, annuities can be tailored to the needs of the client, using medical history and other information.

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