Prior to the Pension Freedoms most people upon retirement would purchase an annuity with their DC pension pot. This would then provide a guaranteed income for life. However, since the Pension Freedoms, people no longer need to purchase an annuity although they can still be a suitable option, either alone or as part of a structured retirement income plan.
Types of Annuity
There are generally 2 types of Annuity:
Lifetime Annuity – as the name suggests these will pay you an income for the rest of your life.
Fixed Term Annuities – These will pay an income for a fixed term, generally between 3 and 20 years.
The annuity income will depend on several factors such as:
Age – generally the older you are the higher the income
Options – adding in a widow’s pension and annual income increases (i.e. inflation linked) will reduce the initial income
Health – having a “impaired” life expectancy due to an existing medical condition may increase the annuity income
Lifestyle – Smokers, being overweight could also increase the annuity income
Upon retirement most people will generally take the maximum tax-free cash from their DC pension pot which is 25% of the overall fund value. The remainder of the pension fund will normally be used to provide an income. Remember, annuities are just one of a number of options in retirement to generate income – please refer to my article here.
There are many annuity providers in the UK, so it pays to shop around to get the best deal. Employing a financial adviser to help you would be a good option – please refer to my article here.
Further general information on annuities can be found here.
Until next time