As you reach retirement age, if you have a personal pension, your pension provider will probably approach you with an offer of an annuity.
Before you decide, it is important that you consider all the options that you have available. Buying an annuity is a big decision that will affect the rest of your life and once it is done there is no going back!
An annuity is a regular income that is guaranteed for life in exchange for your pension fund – the money that you have saved over the years for your retirement. Put simply, you buy the annuity with your pension savings, swapping the lump sum for a guaranteed regular payment. However, once you have effectively sold your pension fund to the annuity provider, you cease to have control over the money. You cannot use the money for an unforeseen event or leave any money remaining in your pension savings to your descendents because it no longer belongs to you. No wonder people put this decision off!
Annuity providers offer different rates and returns for identical factors so it is essential that you seek independent financial advice before committing to buy should you decide to take this course of action.
When you take out an annuity, your income will be fixed every year. Annuity rates have fallen in the last 15 years and a report in the Daily Telegraph points out that twenty years ago a pension pot of £100,000 that once would have secured a fixed income of £15,600 pa – today would only reach £5,860 pa.
Because of this, many people are putting off buying an annuity until the rates are more favourable. Other consumers are looking for a solution that offers them a return for their investment but is flexible and leaves them in control.
One alternative to buying an annuity is to draw down an income from your pension, via a process called Unsecured Income. This will allow you to take money directly from your pension fund but still leaves you with the option of buying an annuity at a later date when you might need it. Consult an independent financial advisor to find the best way to benefit from drawing down your pension.
If you are over age 77, another alternative may be to put your pension fund into an Alternatively Secured Pension (ASP). This fund remains invested invests your pension, potentially gaining growth capital and interest and allows you to draw an income from the ASP fund. You can keep control over your savings and still use the fund to buy an annuity at a later date.
Before you decide, it is important to consult an a pension specialist independent financial adviser for the best way that your pension can work for you. After all you have spent a long time working for your pension!