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Do I have to take an annuity when I retire?
Yes, there are choices out there and you should be looking at them.
by Ian Smith on Jun 01, 2010 at 00:01
Annuities have attractions. They are a promise to pay out a given sum of money (sometimes inflation-linked) until the day you die. As insurance against living too long, they are great.
The bad news? They provide no money for your family when they die. They are inflexible and many feel they provide poor value, especially for those who take them before they are 70.
The two main alternatives are known as phased retirement and income drawdown
Phased retirement means taking the tax-free cash sum from your pension pot over a period of years rather than all at once. Whilst taking all the lump sum from a pension (a quarter of the total) appears attractive, it is less so in reality if it is only going to be then invested in taxed investments. Better take it in say five equal slices over five years. This allows the remaining funds to remain invested (tax efficiently) and usually provides much better death benefits.
On top of that, the later you take your annuity, (all other things being equal) the better. The pensions company offering it to you expects you to be around for a shorter time and so will offer you a higher income.
Income drawdown involves leaving a fund invested and drawing income from this pot.
There are risks here. The investments need to grow fast enough to keep pace with your withdrawals and any charges so that you are no worse off than if you had bought an annuity. That means having a reasonable amount of equity based investments, so it is not an option for a very low risk investor.
For investors willing to take a balanced or higher investment risk it can be a useful option, especially if they have other investments or income sources.
One of the attractions of using drawdown is that the death benefits can be much better than an annuity. On death a spouse or dependent partner takes over the whole fund. They can then:
- continue drawdown
- buy their own annuity or
- take the whole fund as a lump sum less a 35% tax charge
A note of caution. Income drawdown needs careful investment selection and monitoring so the fund, and thus the income from it, does not get eroded over time. With flexibility comes the need for good advice!
Ian Smith of Central Financial Planning can be found at Ian@centralinvest.co.uk or 0845 0066 204
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