Make the most of your money by getting a better understanding of some financial terms. Click a title to see the explanation.
Key Financial Terms
This is the amount of income you get from your pension fund. This is dependent on several factors, including sex, your age, state of health and the type of annuity you require.
These are linked to occupational pension schemes. You will have contributed into a top-up scheme which runs alongside your employers? pension scheme to build up an additional pension fund.
You may have the option to convert part of your pension benefits to increase the amount of tax-free cash available at retirement. Also, if your pension fund is below a certain level, you may be able to commute your entire pension fund as a cash sum.
The death benefits available under an annuity will depend upon the options that have been built into the annuity by the member.
A guaranteed period may be included. This would ensure that the income due to the end of the guaranteed period is paid if the member dies within the guaranteed period. The most usual guarantee period is 5 years, however guarantees of 10 years are available.
A spouse’s and/or dependants’ and/or registered civil partner’s annuity may be included. This is expressed as a proportion of the member’s pension income (i.e. 1/2, 2/3rds, etc.). The maximum proportion is 100% of the member’s pension at the date of death, regardless of the pension source.
A Lifetime Annuity may be purchased with ‘annuity protection’ to preserve an amount of lump sum death benefit, provided that the annuitant dies before their 75th birthday.
An enhanced annuity provides a higher level of income than a conventional annuity. This is achieved by taking into account certain aspects of an individual’s lifestyle.
- Smoking habits
- Area of residence
- Previous hazardous occupation
An annuity provider will usually ask for a doctors report. This is to verify the details in your application form are correct.
If accepted for an enhanced annuity, your income will be higher than from a conventional annuity because the annuity provider expects to pay your income for a shorter period of time. This potentially can make a substantial difference.
MyAnnuityAdviser.co.uk are able to research all the providers offering enhanced annuities to find the best rate.
As everybody?s circumstances are different, and that taking your pension is one of the most crucial financial decisions you are likely to make, it is important that you obtain the best possible advice. MyAnnuityAdviser works closely with a national network of financial advisers qualified to give this advice.
As with AVCs, this is an additional pension fund which runs alongside an employers scheme, but set up separately with an insurance company.
It is worth checking whether any of your pension schemes benefit from guaranteed annuity rates. This may provide you with a higher level of income than you can achieve on the open market.
Impaired Life Annuities are similar to a lifetime annuity in that it pays an income for life. However, it pays a higher income to those suffering with certain medical conditions on the basis that they have a lower life expectancy. The most common medical conditions include, although are not limited to, certain types of cancer,diabetes, high blood pressure, heart conditions, kidney failure, multiple sclerosis and chronic asthma. Please note this is not a comprehensive list, so if you feel you have a condition that is worth considering, you may wish to disclose this when seeking a quotation.
An annuity provider will normally ask for a report from your doctor. As with an enhanced annuity they do this to make sure that the details in your application form are correct.
If you are accepted for an impaired life annuity, your income will be higher than from a conventional annuity because the annuity provider expects to pay your income for a shorter period of time. This can make a substantial difference.
This lets you draw an income from your pension fund while leaving it invested. Drawdown has limits to the income you can take. HMRC Rules on income drawdown have changed recently, and are likely to change again in the future. It is important that you seek advice on this area before making any decision.
The effect of inflation on your money means that it will buy less each year. With this in mind, you may wish to consider inflation-proofing your retirement income.
These rely on investment performance which means your income could go down as well as up.
This describes the main aspects of an annuity such as its aims and risks. Make sure you read and understand this information and ask questions if there is anything you?re unsure about.
This is an investment that converts your pension fund into pension income that is paid to you for life. Any income is taxable.
If you have your pension fund invested in with-profits, there may be a penalty imposed if you want to cash in your fund before or after its maturity date or other date(s) specified in the policy.
You have the right to shop around and buy your annuity from the company offering the best deal for you. This may be one of the most important financial decisions you will make. MyAnnuityAdviser.co.uk will assist you in obtaining the best deal.
You can split your pension fund and buy annuities at different times
You may have decided previously to contract out of SERPS or State Second Pension which has accumulated an additional pension fund. This will be shown on your pension scheme statement as protected rights.
Similar to a Personal Pension, but was set up before 1988, when personal Pensions became available. Some retirement annuity contracts provide guaranteed annuity rates. It is very important that you check if this applies to your retirement annuity contract.
Used by members of occupational pension schemes when they leave service, or when the scheme is wound up.
Income produced by an annuity will be taxed at the member’s highest marginal rate.
An amount of cash set by HMRC which can be taken at retirement free of income tax. Please note pension schemes may have different rules on the amount of tax-free cash you can take.
The table below shows examples of the typical impact of adding options to a level annuity:
(Figures based on a 65 year old male with a 65 year old spouse and £100,000 to invest after TFC taken. Source: moneymadeclear March 2011).
INITIAL ANNUAL INCOME
|5 year guarantee||
|5 year guarantee plus increasing by 3%||
|5 year guarantee plus increasing by RPI||
|No guarantee with a 50% spouse?s pension||
|5 year guarantee plus a 50% spouse?s pension||
|5 year guarantee plus a 50% spouse?s pension plus increasing by 3%||
|5 year guarantee plus a 50% spouse?s pension plus increasing by RPI||
Put simply, annuity rates are often calculated using average life expectancy. Some companies will offer a higher rate to people with a shorter life expectancy that may be attributed to illness or lifestyle. These annuities are called enhanced or impaired annuities.
It has been suggested that one third of the population may qualify for an enhanced annuity when it comes to retirement. History of heart disease, smoking or being overweight may all qualify for an enhanced annuity and get you a better rate. Knowing what options are available may mean you can get a better annuity rate than simply staying with your pension provider.
You usually have to go through an independent financial adviser to get an enhanced annuity.