Kevin Mills
Annuities
You may feel that a conventional annuity may not be your best option. There are other types of annuities designed to provide flexible, and hopefully, increasing income which may suit you better.
You may want to consider a “with-profits” annuity. This is designed to provide an increasing income during retirement without the initial much lower annuity associated with index linked annuities. With-profit bonuses are historically low (typically less than 3.5%). If the annuity provided by a with-profits annuity at least matches a level conventional annuity at the outset there should be a reasonable chance that the with-profits version will provide a rising income if with-profit bonuses increase. If the bonuses are less than the assumed rate the income is likely to fall. Bonuses are not guarenteed.
Unlike a conventional annuity there is a risk that your income may fall. However for some this risk may be acceptable in the expectation of receiving an increasing income.
Another option is a “flexible five year guaranteed annuity”. As the name implies you buy a guaranteed five year annuity. This costs less than a lifetime annuity which allows you to invest the balance of the pension fund in the hope that this will grow. In five years time you should also benefit from higher annuity rates because you are older. If the investment has done well, you should end up with more income than a conventional indexed annuity.
But there is risk that the investment may not perform and there is no absolute certainty that annuity rates will improve in five years time. However for some this may be an acceptable risk with a portion of your pension.
An aspect of pension income planning that needs to be kept in mind, once you reach 65, is the preference to maintain your taxable income below the Age Allowance income limit. If your taxable income is above £20,900 you will be taxed at a marginal rate of 33% until the Age Allowance of £7,550 for 65-74 year olds has been clawed back to the under 65 personal allowance of £5,225. You could avoid this trap by investing the tax free cash in ISAs and non-income producing investments.
The above does not constitute advice. It is essential to seek independent financial advice when choosing the annuity which is right for you, use our contact page to request a initial consultation without charge or obligation.