Until the pension reforms of April 2015, it was compulsory for most people to purchase an annuity when they retired. Since the reforms, retirees have been given unrestricted access to their money, even being able to take the full fund as cash if they so desire.
Despite this, annuity products have remained a popular choice as an annuity is still the only option that provides a guaranteedfutureincome.
Annuity choices today
If you are looking for a guaranteed income from your pension pot every month to ensure all those vital bills are covered – plus the ability to access up to 25% of your fund as tax-free cash, then you have two main options:
How do fixed term annuities work?
Fixed term annuities share many similarities with lifetime annuities, but with some key differences, which in today’s market are making them an increasingly popular option.
A fixed term annuity will pay you a regular income for between one and twenty-five years – the amount of time is your decision.
At the end of your fixed term, you receive a ‘guaranteed maturity amount’ to buy a further retirement income product or take out as cash, albeit subject to tax.
Or, if you don’t currently need an income, you can take just your tax-free cash sum and enjoy a much larger guaranteed sum at the end of the term.
Why have fixed-term annuities become so popular?
The main reason is their flexibility – they can buy you time if you find today’s historically low lifetime annuity rates unattractive. They allow you to take your tax-free cash immediately with or without any income. The less income you take, the greater the guaranteed amount available to you at the end of your selected term (without any investment risk) which you can then use, for instance, to buy a lifetime annuity – or buy another fixed term annuity. Your future income prospects may also be improved if you can get by on the tax-free cash alone until the end of the selected term.
Do you want the whole of your pot in cash?
After taking your 25% tax-free cash sum, if you want the whole of the remainder in cash, then it is added to your income in that tax year and subject to income tax at your marginal rate which could push some people into a 40% tax rate. This has deterred many people from taking the whole amount but some have been using a fixed term annuity to effectively ‘strip out’ their money over a number of years, thus reducing the impact of tax on their fund.
Might you wish to defer buying an annuity?
Other people, however, have been opting for longer fixes with long-term certainty in mind. Due to the Brexit vote and the reduction in base rate, there is an increasingly downward pressure on annuity rates, resulting in the potentially higher income from a fixed term annuity looking more attractive, albeit possibly over less than one’s lifetime.
Whatever your individual requirements for retirement, with the assistance of an annuity specialist you will soon discover there are a number of options available to suit you.
A gamble worth taking?
There are risks to consider with fixed-term annuities, of course. The main risk is that annuity rates may be lower in the future if you are then looking to purchase a lifetime annuity with the money from the guaranteed maturity amount.
However, it is possible that the retirement income you qualify for at the end of the fixed term period could be higher than you would be offered today. Annuity rates could improve, or your health may deteriorate, making you eligible for enhanced terms on your annuity.
You should also consider the risks of using a fixed term annuity to assist in withdrawing your entire pension fund over a number of years to reduce tax. If this will leave you without the means to purchase a guaranteed income in the future, then you will need to carefully consider how else you will fund your retirement.
Table: Benefits and Drawbacks of Fixed-term Annuities vs Conventional Annuities
|Fixed-term Annuity||Lifetime Annuity|
|Take up to 25% tax-free cash at the outset with no further opportunity after this time||X||X|
|Take up to 25% tax-free cash without taking an income and without investment risk||X|
|Offers a regular income for a set amount of time||X|
|Offers a regular guaranteed income for life||X|
|Potentially benefit from increased annuity rates at the end of the term due to increased age / deterioration in health||X|
|Future pension income unaffected by market falls||X|
|Option to increase income over time to combat effect of inflation||X||X|
Speak to a specialist
When it comes to finding out which retirement income options could meet your current and future needs, speak to one of our annuity specialists. Call 0800 652 1316 to discuss your options and to receive your FREE retirement options report.
Retirement Line work on a non-advised basis. Ifyou are at all unsure of which options suit you, you should seekregulated advice.