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Why Should the Annuity Buyer Beware?
WHY MANY RETIREES IGNORE A MUCH BIGGER INCOME
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This service is designed for those at or approaching retirement. When you near retirement, your pension provider should write to you with details about your pension fund. They'll tell you about using your fund to buy an annuity.
This is important information, so you must read it carefully and ask your pension provider or financial adviser about anything that you don't understand.
An independent financial advisor may be able to secure several thousand pounds more for you from annuity providers other than your pension provider. Many retirees are unaware of this very important information. The more information you have the more able you will be to recognise the best advice when you receive it.
This site is purely here to aid your understanding about annuities. It is important that you do not use this information in isolation. You are very strongly advised to take professional advice before buying an annuity and you can then choose the best annuity scheme that suits you.
What Does the FSA Say About Annuities?
FOUR KEY MESSAGES FOR CONSUMERS
1. Buying an annuity is an important step and you do have choices. These choices are crucial because they affect how well-off you are in retirement.
2. You should shop around for the best rate before making any decisions. Contrary to popular understanding, you do not have to buy their annuity from the same insurance company you built your pension fund up with.
3. There are key questions which you need to think about to help you choose a suitable annuity which meets your needs. Questions include "is the annuity just for you or do you have a spouse you want to provide for?" "If you are in poor health, is a high initial income your priority?"
4. Annuities are complicated so you should consider getting specialist advice.
What is Open Market Option?
AVOID MAKING A HUGE MISTAKE
The Open Market Option allows those approaching retirement to shop around for options to convert their pension fund into an annuity. Rather than just taking the rate offered by your pension provider you now have a choice.
An alarming UK government research study showed that 60 per cent of annuity claimants do not use their Open Market Option and 40 per cent of information packs from pension firms did not advertise the option clearly.
Many still don't use the Open Market Option because they either don't realise they can or are unaware of the benefits of doing so. It has been claimed that retirees who don't use the Open Market Option and take the default annuity offered by their pension provider, may be missing out on up to 40% more income. It is important to note that once an annuity has been purchased it cannot be changed.
The Association of British Insurers is now working with the retirement industry to educate consumers about the Open Market Option.
What Makes Open Market Option Attractive?
SHOP AROUND FOR A HIGHER INCOME
You can get more from an annuity if you shop around. You may qualify for what is known as an Enhanced Annuity (sometimes known as an Impaired Life Annuity).
This pays a higher income to people who suffer from a range of health conditions - anything from asthma to heart disease, cancer or stroke.
Additionally, higher rates are sometimes offered to people who have retired from certain occupations or people who live in certain parts of the country.
To make the most of the Open Market Option it is important to speak to an Independent Financial Adviser who will explain the different retirement options available.
But what actually is an Annuity?
THE BASICS EXPLAINED
The conversion of pension income into an annuity is compulsory by the age of 75 in the UK.An annuity is an arrangement where you make a lump-sum investment. From this investment you receive a guaranteed level of income. Most annuities are bought using funds held in money purchase pension schemes.
Basically, an annuity converts a savings fund into income and that income will be paid to you for the rest of your life.
An annuity is payable for your lifetime, although it is possible to select a fixed period if purchasing an annuity with cash rather than pension funds.
Examples of these types of "Compulsory Purchase Annuity" are conventional annuities, with profit annuities and unit linked, or 3rd way annuities. Annuities that are purchased from savings, not from a pension scheme are referred to as Purchase Life Annuities and Immediate Vesting Annuities.
When your pension fund reaches maturity, your pension provider will advise you of the fund value, and general information about annuities and the level of annuity income you would receive.
You are then entitled to use your Open Market Option, which allows you to transfer the fund value to another annuity provider of your choice. This enables you to take advantage of a higher annuity income which may be available from a different provider.
You're normally entitled to take up to 25% of your pension fund as tax-free cash. The rest of the fund must be used to purchase an annuity or alternatively secured pension (Compulsory Purchase Annuity), before the age of 75. Annuities are usually provided by insurance companies.
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