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Ten Important Facts About Annuities

By: Kevin Dowling BA (IMC) - Updated: 13 Oct 2012 | comments*Discuss
Annuity Annuities Retirement Pension

Annuities are often considered to be a thorny and complicated subject for people facing retirement. Here are ten important facts about annuities that everyone needs to know before they choose their retirement funding.

1. You Can Defer Purchasing Your Annuity

When you reach retirement age, you don’t have to buy an annuity straight away. At present you can put off purchasing your annuity until the age of 75.

So, if you retire at 65, you may decide to continue working part-time and continue making payments into your pension. However, once you reach 75, you are then required by law to purchase an annuity in some form.

2. You Can Shop Around for the Best Annuity Rate

You are not under any obligation to accept the annuity rate offered to you by your pension provider. In fact, you might be able to find a far more competitive deal by using the ‘Open Market Option’. This means that you can choose a different company to manage you pension pot and provide you with an annuity.

Different companies offer differ rates on their annuities, so it is always worth taking your time and shopping around before deciding on the best annuity for you.

3. You Might Be Able to Take Your Pension as a Lump Sum

If you have a relatively small pension pot (a total fund of less than £16,500) then the Government will allow you to withdraw your entire pension as a lump sum.

If you have a pension worth more than the £16,500 threshold, you are legally allowed to withdraw up to 25% of the total pension amount as a tax-free lump sum. The remainder will become your new pension total and will be used to calculate the value of your annuity.

4. You can Choose How Your Annuity Payments are Made

You get to decide how often you wish your annuity will be paid. You can opt for monthly, quarterly, six-monthly or annual payments. You can also choose to be paid in advance or in arrears, although your income will be greater if you choose to be paid in arrears.

5. Smokers Get Higher Annuity Rates

Annuities are calculated based on a person’s projected life span. This means that if you are a smoker, the pension fund provider will be able to offer you a higher annuity value, based on the probability that they will not have to keep paying this annuity for many years to come.

If you are a smoker, or you are in bad health, you can opt for an impaired or ‘enhanced’ annuity, which could increase your annuity payments by between 5% and 20%, when compared to a standard annuity.

6. Annuity Rates Seem to be Falling

Recently, annuity rates in the UK have been at their highest in five years.

However, the credit crunch has taken its toll on annuity providers and they have been reducing their rates steadily over the last quarter. This means that now more than ever, anyone looking to purchase an annuity should use their Open Market Option to try to find the best deal they can.

7. You Can Choose Income Drawdown Before Purchasing an Annuity

If you feel that annuity rates are too low, and you’d prefer to hold off purchasing an annuity until you might be able to get a more competitive deal, you can choose Income Drawdown to take money out of your pension fund.

Income Drawdown means that your money is still invested, but you can choose a level of income to take out before you purchase your annuity. The amount you are able to take out will depend on your age and the value of your pension pot.

However, choosing Income Drawdown means that your pension pot will be reduced as you take money out, and there is no guarantee that you will be able to get a better annuity rate later on.

8. Your Annuity Will be Taxed

Sadly, even for pensioners, tax is unavoidable. For those who pay the basic rate of tax, you will continue to be taxed at the same 20% rate on any income you get from your annuity.

If you pay income tax at the higher rate you will have to pay the higher rate of tax on your annuity income.

9. You Don't Have to Take the Tax-Free Lump Sum

Most pensioners decide to take advantage of their option of withdrawing a tax-free lump sum before their annuity starts. However, you don’t have to. Instead, you could keep the money invested and boost the value of your annuity.

Whatever you decide, bear in mind that once your annuity has started you cannot then request your tax-free lump sum.

10. You Cannot Change your Mind

Once you have chosen an annuity and the agreement has been signed, you will not be able to change to a different annuity option, or go for a better deal.

To make sure you make the right decision, speak to an Independent Financial Adviser (preferably a retirement funding specialist) who will be able to give you all the advice you need.

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