Are You Looking to Retire Soon?

Many people as they approach retirement wrongly assume that they have to buy an annuity from the company that has held their pension. This is simply not the case. There are very significant differences in the performance of the best and worst annuities. All pension providers must give you the option of what is called 'The Open Market Option', this is your right to shop around on the open market to purchase your annuity.

Worryingly, figures from the Association of British Insurers (ABI) show that 61 per cent of people who bought an annuity in 2007 did not shop around and bought their annuity directly from the pension provider they had saved with.  As some of the annuity providers do not sell direct to the public, the best way to ensure you get the highest annuity possible is to use the services of an Independent Financial Adviser (IFA). An IFA will research the whole of the market to find the best annuity rate for your particular circumstances. The IFA will also ask you some questions to see if you qualify for enhanced annuity rates. If you do qualify for enhanced annuity rates then quite possibly you could see a significant lift in the payments you get from your annuity.

You convert your pension fund into a regular income that will last as long as you live. The income is taxable and the amount that you get each year will depend on the size of your fund, the annuity rates the annuity provider offers, your gender, age and health, and the type of annuity that you opt for. More and More annuity providers are now using your postcode to determine annuity rates. There is research that says where you live in the UK is a factor that may determine your life expectancy. Life expectancy is how the annuity provider's work out annuity rates, some people will live shorter than the annuity provider predicts, but some will live longer. You are allowed to take up to a quarter of your pension fund as a tax-free lump sum and most convert your entire remaining pension fund into an annuity before the age of 75.

Once you have shopped around on the open market and found the best annuity provider for your particular circumstances then you need to consider the options available to you. The main options to consider are, whether you want a continuing pension to a spouse or civil partner, if you want a guarantee period and if you want your pension to increase each year or remain level throughout. All of these options have an effect on reducing the amount you can get, but have to be carefully considered. Again if you use the services of an IFA he will point out how much each option costs for all the annuity providers as each are different.

If your pension pot is less than £17,500 (tax year 2009/2010) then it is quite possible that you could take the whole pension fund as cash. You can of course buy an annuity, but, should you qualify under the Triviality rules then 25% of the pension fund can be taken as tax free cash with the balance taken as cash but taxed as earned income. You have to be aged between 60 and 75, there are some other rules surrounding taking the cash so if you think you qualify then conduct further research on the subject.