Annuities
The most common form of securing an income in retirement from the proceeds of a
pension plan is by way of an annuity purchase. An annuity is purchased
with the current insurance company that runs the pension plan or by utilising
the open market option to seek the best annuity rate in the wider market. In
return for the annuity purchase payment the insurer will pay an income
guaranteed until the individual’s death.
To ensure an element
of value for money should death occur in the early years it is possible to
purchase a guarantee with a minimum of your payment of income for either 5 or 10
years. This will ensure that a payment will be made to the estate of the balance
of the payments for the guaranteed period.
The cost of the annuity depends upon the life age of the individual, life
expectancy ratios and interest rates. Another factor in cost is the guarantee
and any spouse’s benefit secured.
Single Life Annuity
The income is payable only to the annuitant for the rest of their life. Income
payment ceases immediately on death.
Joint Life Annuity
Income continues to the surviving spouse at a pre-determined portion of the
annuity income, usually 50%, 66% or 100%. Similarly, income payable to the
surviving spouse is guaranteed until their death.
Joint Life Indexed Annuity
If you select an annuity without any indexation then the payment will remain
constant from onset until your demise. An alternative to this to combat
inflation you can build in an index at either a flat percentage increase, or the
annuity linked to the RPI ensuring obviously the payment increases throughout
the term. However, it is fair to say that it often takes 12 to 14 years to get
to the level where you were had you not taken any indexation.
Impaired Life Annuity
Some companies will pay a higher income if the annuitant has certain health
problems or a lifestyle that is expected to shorten lifespan. Cancer, heart
attack, asthma and diabetes are all conditions that may be considered to shorten
lifespan. Smoking and obesity are also considered to shorten
lifespan.
With Profit Annuity
A with profits annuity offers an alternative to being tied into the current low
rates of conventional annuities, by linking annuity income to a wide range of
investments rather than just fixed interest investments. The annuity starts at a
lower figure than a conventional one, but the bonus mechanism of the with profit
funds helps smooth the peaks and troughs in the investment performance and
should ensure that an annual bonus becomes payable, which over a period of time
would then offer a higher annuity than a conventional one.
This type of annuity can therefore be considered as an acceptable halfway house
between a conventional annuity and the more volatile and more risky unit linked
investment annuity.
Unit Linked Annuity
Again whereas a conventional annuity invests in a low risk fund and it is wholly
dependent upon interest rates, the unit linked annuity is purchased by investing
the fund proceeds into a variety of investment vehicles with the ambition of
securing growth of the fund and thus increasing the annual income. The future
level of annual income is dependent upon the investment returns and can fall as
well as rise. For this reason cautious investors should not consider this as a
suitable product.
Guaranteed Period
All the above annuities can be provided on a single or joint-life basis with no
guarantee. This means in the event of your demise the benefit on a single life
can immediately be lost. To combat this you can build in a guarantee period of
either 5 or 10 years at a relatively low cost and is well worth considering.
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