| ANNUITIES EXPLAINED
August 2008
My one-man mission to simplify retirement continues and I thought I’d kick off by explaining the most popular type of retirement income plan – called an ‘annuity.’
There are two types of private pension scheme. Some older schemes offer a guaranteed level of income at retirement, but the most common is basically a savings plan, which builds up an investment pot.
Those of you with the latter scheme must decide how you will use the pot to give you an income. Upon retirement, the company you have been saving with will quote their rates for buying an annuity with your pot, but you don’t have to go with them – you should find the company that offers the best rate for your money. Amazingly, around 80% of people don’t shop around!
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If you buy an annuity, the income you receive depends on how many options you build into your pension. The highest is simply a pension for you, for life. At the other end of the scale, you could choose an income for you and then for your spouse on your death, increasing with inflation and guaranteed for 10 years – but it will cost more, so the income will be much lower.
These are extremes and most people plump for something in between. An independent adviser has access to the whole market and will look at the options available to ensure you end up with the right combination. It is also worth noting that if you have had poor health or you are a smoker, you could get a higher rate, as the providers don’t think you will live as long.
Annuities are guaranteed for life and carry no investment risk. However, a combination of lower interest rates and our increasing longevity has meant rates have roughly halved in the last 15 years, giving the impression they are not as good value as some products on the market.
Over the coming months, I will be exploring the other options available, so you can make an informed judgement. If you can’t wait that long, or you are confused about the type of pension you have, as always, seek professional advice.
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