What is a Pension annuity?
A pension annuity is a vehicle that allows you to convert all or part of your money purchase pension arrangement, such as a personal pension, into a guaranteed amount of income, payable for the remainder of your life. They are generally offered by life insurance companies and the amount of annuity offered for a given amount of pension savings will vary. So it is important to decide on the type of annuity best suited to your needs and to then research the market to ensure you can get the best rate available.
Why would you get a pension annuity?
The rules governing private pensions limit the amount of your pension savings that can normally be taken as a, currently tax free, lump sum to 25% of those savings. The remainder of your pension savings must be taken in the form of income on which income tax may be payable. The most common form of pension income is a pension annuity. However, there are many retirement options for larger pension savings and other forms of pension income that can be considered, which carry some level of investment risk.
What types of annuity are on offer?
The annuity market is constantly evolving as legislation changes. Annuities will normally be payable for life and can be bought with a guaranteed payment period of up to 10 years, so that income is payable for that guaranteed period even if you die.
It is possible to arrange annuities that will continue to provide an income for a surviving spouse or civil partner if you die.
In addition, annuity income can remain level in payment, or set up so that the amount of income increases each year, either by a fixed rate or by price inflation to give some element of inflation proofing.
The choice you make will affect the initial amount of income you can expect. In simple terms, the more that is insured against future events the lower the initial level of annuity income that you can receive.
It is also possible to buy annuities that are linked to investment performance of underlying investments and ‘temporary’ annuities which are payable for up to a 5 year period. This gives you the chance to review what shape your future annuity income should take after that period
What are the alternatives to a pension annuity?
The alternative options to provide income from your pension savings are scheme pensions, from certain self-invested pension plans, as well as income withdrawal. Income withdrawal, also known as drawdown, is either capped, as to the amount of income you can take from your pension each year, or totally flexible. To take advantage of flexible drawdown you must already be in receipt of guaranteed pension income from private pensions (such as an annuity) and State pensions of currently £20,000 a year.
All of these options carry an investment risk that the performance of your underlying investments may result in the eventual pension annuity being less than would have been available at an earlier point. They do however provide regular pension income while you are uncertain as to the type of annuity you might eventually want to buy. They can also ensure that any remaining pension investment will be used to provide benefits for any beneficiaries, such as spouse, partner or children, albeit subject to tax charges.
What does Skandia offer?
Skandia does not offer annuities directly for your offering pension savings. Our pension contracts instead allow you to buy an annuity with your pension savings through access to the open market. This means that you have complete freedom to select the annuity provider best suited to your individual needs. Skandia will pass those pension savings, without administration charge (unless any early enchashment charges apply), to the annuity provider you choose, who will then deliver the annuity income.
Within the Skandia Collective Retirement Account you can also choose to use your pension savings to take advantage of capped or flexible drawdown and can do so by phasing in those options over time for tax efficiency. There is no requirement to buy an annuity from a Collective Retirement Account at any age. You will have complete freedom of choice from age 55, which is the minimum age at which pension income can normally be taken, as to how and when your pension savings can be used.
You can find out more about planning for the future with Skandia or speak to your financial adviser who can run through your retirement options in more detail.