Pension Annuities: The Comprehensive Guide
Most of us work many years in a row to reach a day when our National Insurance contributions begin to pay us to do nothing else but put our feet up and enjoy our just rewards on what we've been paying to the government all these years. At least that's the hope if the Government have invested the money wisely.
Introduction to Pension Annuities
Our reward is a lump sum thanks to civil servants betting our hard earned on markets and business in the hope it pays out an amount we can retire with. Then we gladly take receipt of that sum and look at other investment opportunities such as pension annuities.
To safeguard against failure or a shortfall, we tend to opt into separate pension schemes with companies we work for over the years. Or set up stand alone pension policies with independent advisors and pay into a pot regularly to earn more when we reach pensionable age. These are ways we offset any failure by the government to invest our money wisely. Unfortunately each generation seems to rely on the one that follows for the pension rather than what our generation paid in originally.
So some bankers and financial institutions decided they could provide another legal way to maximise more from your pension when you finally come around to retiring. This money from the pension, if you choose to accept any or all as a lump sum, the payment you re-invest is termed a contribution to a pension annuity. This information does not constitute advice and you should seek legal assistance before deciding on a pot to pursue. An advisor can assist in helping you ascertain whether a temporary annuity or a lifetime annuity is in your best interest.
What Is A Pension Annuity?
Firstly, let's understand what a pension is. Ever since you started work, whether employed or self employed, you have paid a form of National Insurance (NICs). There are different classes but ultimately these form the amount of money you will receive when you retire and stop working. When this day arrives you can either take all the money, a percentage and the rest in monthly payments or all in monthly payments and you keep control of what happens to it.
Although termed a pension annuity, they are pretty much termed annuities and is well known as a retirement choice. With this option you can sell your pension, all or part, to an insurance company that specialises in these types of financial transactions. They re-invest the amount to ensure you get paid an amount of money each year or month for the rest of your life.
Depending on which annuity you take out, temporary annuity or a lifetime annuity, there is a rate of return attached to each type. As you have probably worked out by now, the insurance company benefits in multiple ways. They receive a percentage above the rate they are promising you, and could well end up receiving the whole amount of the remaining payments should you die early and not have a joint annuity policy.
The upside of course is, having taken your 25% lump sum as cash, you'll receive the remainder every year until you die. You could well outlive the original policy amount, meaning you'll start to see a return greater than the pension pot you originally received. Which is the aim, to reinvest an amount for a guaranteed sum of money on an annual basis no matter how long you live. There are pension annuity calculators that help you work this out.
What Are The Different Types Of Annuity?
You will need to shop around or use an annuity broker when you settle on this financial product. One of the aspects you will be making annuity comparisons on is the rate. This is termed the annuity rate, a percentage which when calculated and offset against other terms is the rate in which your monthly or annual payments paid back to you, will be based. The payments will also be linked to your age, government bond yields and which one of the following annuity products you select.
Fixed Term Annuity: If you are aged 55 and are ready to invest part or all of your Government pension, you can use this fixed term annuity option which despite it's name, is more flexible than the rest. You can choose a fixed term of five or ten years and decide upon a lump sum return at the end of the period while receiving annual payments / payouts in between. If you're feeling young and healthy, you can do so all over again or choose a different method by reinvesting your annuity return.
Escalating Annuity: For the financially savvy, you may understand that at the age of 57, the price of food or energy may not be the same as it will be when you're 87. How will you make that £3000 a month stretch as far as it did 25 years ago? By receiving less as a percentage rate when you're 57 and ensuring there's more when you're 87, you will be able to meet the demands of a modern economy. This is what is meant by an escalating annuity, the amounts increase to hopefully be in line with inflation or life's increasing living costs.
Enhanced Annuity: This lifetime annuity has multiple names, impaired life annuity, ill health annuity or smoker annuity. It's a little ironic but for the first time in your life, you could be rewarded for living your life as you pleased. Insurance is a game of risk but as you are giving their company your money they wish to give you a better deal.
This is like health insurance in reverse. Where you might have to pay more because you smoke and may need more medical attention, instead they pay you more because you smoke and may die earlier. my Granddad smoked until he was 92 and had a Whiskey every night. So the benefits of an enhanced annuity are twofold, this probably pays more earlier but if you outlive the insurer's expectation's, you win again. There are over 1000 conditions that could fall into this category. Nearly 70% of the UK's pensioners can benefit from this calculation, unfortunately.
Standard Annuity: As the name suggests this is the most simple annuity to understand. The rate of return is set when you take the pension annuity policy out. Whatever the sum you invest, the annuity rate suggests how much you can receive on an annual basis until the day you die.