What Income will your Pension fund buy you?
When you retire, your pension fund finally becomes available to you. You can immediately take up to 25% as a Tax Free Cash lump sum, and the rest you may invest in an annuity if you wish. Pension annuities are designed to give you a guaranteed income for the rest of your life. Once you have selected an annuity suitable to your circumstances, you cannot later change your mind and move funds elsewhere. That's why it's so important to get the best deal from the start. Often the best annuity you can receive is not available from the company that looks after your pension fund. How the income from your annuity is calculated: |
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The income you receive from your annuity is dependent on a number of factors:
- Your age on the date the annuity is purchased
- The size of your pension fund
- The yield available on the underlying investments (usually fixed-interest investments such as corporate bonds or gilts)
- Any additional benefits you select with your annuity
- Assumptions about your life expectancy made by the insurance company
- Your income from a pension annuity will be treated as earned income and taxed under the Pay As You Earn (PAYE) system.
Annuity Payment frequency:
- Monthly
- Quarterly
- Half-yearly
- Yearly
How often you receive payments will affect the overall annual income you receive. In general, the higher the frequency, the lower the annual income.
Life Expectancy
Did you know that people in the UK underestimate life expectancy in retirement by around 2 years. Given that the Government Actuary's Department figures show that a 65 year old male has an average life expectancy of a further 19 years, this represents a considerable shortfall and could have an impact upon your own retirement planning.
Figures usually quoted on life expectancy are averages, but did you know that more than 50% of people of any given age live longer than the mean. The table below, based on recent mortality tables, shows the ages beyond which 50% and 25% of male and female annuitants aged 65 can expect to live.
| Life Expectancy | Age beyond which 50% could live | Age beyond which 25% could live | |
| Male Age 65 | 84 | 86 | 92 |
| Female Age 65 | 87 | 89 | 95 |
According to the Spring 2005 edition of Population Trends from National Statistics shows that there are more than 1.1 million people aged 85 or over in the UK, an increase of more than 100% since 1976. Approximately 400,000 of these are aged 90 or over - an increase of more than 170% since 1976.
Source: Just Retirement Ltd, April 2005
These figures show that there is a much greater chance that you will live for many more years in retirement, therefore it is important that you choose the right Annuity, and retirement options.
Open Market Option
By choosing the most competitive annuity provider at retirement you could increase your income. You could well find you can obtain a higher income exercising your open market option. An open market option allows you to shop around and find the best annuity rate for your circumstances from the entire Annuity Market place.
This may seem quite a daunting exercise ringing around up to 20 annuity providers to find out what rate you can get. However we can make life easier for you, we can get access to all the annuity rates on our system, that are kept up to date on a daily basis. So why not use our Annuity Enquiry Form and let us do all the work for you. We can also arrange for all the paperwork to be sent to you, and make sure your annuity will be paid to you when you are due to retire.
Different companies offer different annuity rates and these change frequently so its important to review these at the time you retire. Just because your pension company is the most appropriate for building up your pension fund does not mean that it will be the most appropriate for your retirement income.
Part of your annuity decision is to choose the additional features you feel are important to add to your annuity, as you must do this at the start, you cannot add these features once your annuity is being paid to you. It is therefore important that you seek expert advice to find out what these options are and which is right for your situation.
Spouses Pension
If you are married or have children still in full time education you may want to protect them in the event of your death. You can therefore add a spouses or dependents pension to your annuity. This will result in a lower annuity income, but will mean if you die they will continue to receive an income. Typically people opt for a 50% spouses pension, but you can go as high as 100% spouses pension if you wish.
Guarantee Period
You can add a guarantee to your annuity. Typically most people who add this feature will choose a 5 year guarantee. This means that your annuity income is guaranteed to be paid for 5 years even if you die in this time. Usually this guarantee will be paid as a lump sum for the amount outstanding.
If you have opted for a spouses pension do you need a guarantee as well?
It will seriously reduce your annuity income you will receive, by having both options. Some people will feel, why do I need a 5 year guarantee if my spouse will continue to receive an income when I die anyway. But the final decision is up to you, unless you receive advice on the subject.
Escalation
You can choose to have your annuity increase each year. The options available are increase by RPI, or a flat 3% or even 5%. This option is expensive to add on, but will allow your income to increase to combat against the effects of inflation eroding your income over time. This option will be beneficial to those who live longer, as it will take typically 15 years plus for your income to get back up to the level you could have taken, without adding on this option when you first purchase your annuity.( Escalating Annuity versus Level Annuity) It might be worth getting a quote with escalation, and without, to see the difference in the figures you will receive, before you decide.
| Standard annuity | gross income |
| Standard Annuity ( Single Life) | £6,278 pa |
|
Standard Annuity ( 50% spouses pension) |
£5,899 pa |
The annuity rate shown above is based on a purchase price of £100,000, Male, with a 5 year guarantee at age 60, and should be used as a guide only. The actual rate you will receive will be specific to your own circumstances, and dependent upon the additional features you require to be added.
