Get free updates - subscribe to our monthly newsletter Subscribe
Planning for your retirement can take 40 years to achieve, but can all be undone in an instant if the wrong decisions are made.
Many people approaching retirement with funds invested in their own personal or employer sponsored arrangements (commonly referred to as money purchase pensions) are still not aware of the options open to them and that in most cases they actually do not need to secure their retirement income from their existing pension provider.
The Open Market Option (OMO) was introduced as part of the 1975 Finance Act and allows someone approaching retirement to shop around when converting their pension pot into an annuity, rather than simply taking the default rate offered by their existing pension provider.
Those who don’t exercise their option to use the OMO and settle for the deal offered by their current pension provider may be not be aware that they may be able to obtain substantially more income from another provider. This is especially important as once an annuity has been purchased the decision cannot be reversed, so you've got to get it right first time.
One of the main reasons that people can get more from an annuity if they shop around is that they may qualify for what is known as an enhanced annuity (also known as an Impaired Life Annuity), which pays a higher income to people who suffer from a range of health conditions - anything from asthma to a serious heart condition. Other providers enhance rates simply based on where you live or your lifestyle. For example, those who smoke will often receive better annuity rates than a non-smoker.
Annuity rates can also be affected by a number of different factors in addition to your state of health. If retirement income is required on a single or joint life basis, the level of benefit you wish your dependent(s) to receive, if you want your pension income to escalate over time and the frequency of payment are all aspects that affect the income you receive - some substantially - and need careful consideration.
Perhaps the most significant impact is whether the retirement annuity income is set up on a level or escalating basis. Escalating annuities usually start at a considerably lower income level than annuities purchased on a level basis and it can take a number of years before a break even point is achieved when income from the two is compared.
With interest rates and Government gilt yields at historically low levels, this makes the decision to buy an annuity that much more difficult, although a guaranteed income for life is still the best option for many, irrespective of current market rates.
Virtually all pension arrangements offer access to a tax free cash lump sum. For most personal pensions and a good deal of other employment based money purchase schemes this is up to 25% of the fund value, although some do permit more than this, so a decision needs to be made whether you access the maximum tax free cash available or take less in favour of a greater income.
There are so many things to consider before your retirement income is set up and given the complexity of this particular area, it is vital that you speak to an Independent Financial Adviser (IFA). An IFA can examine the whole market and look at all the options available before you make that crucial final decision.
Armstrong Watson Financial Planning Limited is authorised and regulated by the Financial Conduct Authority. Firm reference number 542122. Registered as a limited company in England and Wales No. 7208672. Registered office: 15 Victoria Place, Carlisle CA1 1EW Armstrong Watson Financial Planning & Wealth Management is a trading name of Armstrong Watson Financial Planning Limited.
If you like this article and would like our FREE updates sent straight to your inbox then subscribe to our monthly newsletterSubscribe
All content © 2015 Armstrong Watson. All Rights Reserved. Website by Simon Pighills.
Armstrong Watson LLP is a limited liability partnership registered in England and Wales, number OC415608. The registered office is 15 Victoria Place, Carlisle, CA1 1EW where a list of members is kept. Armstrong Watson Accountants, Business & Financial Advisers is a trading style of Armstrong Watson LLP. Armstrong Watson LLP is regulated by the Institute of Chartered Accountants in England and Wales for a range of investment business activities.
Armstrong Watson Audit Limited is registered to carry on audit work in the UK and Ireland by the Institute of Chartered Accountants in England and Wales. Registered as a limited company in England and Wales No. 8800970. Registered office: 15 Victoria Place, Carlisle, CA1 1EW
Armstrong Watson Financial Planning Limited is authorised and regulated by the Financial Conduct Authority. Firm reference number 542122. Registered as a limited company in England and Wales No. 7208672. Armstrong Watson Financial Planning & Wealth Management is a trading name of Armstrong Watson Financial Planning Limited. Registered Office: 15 Victoria Place, Carlisle, CA1 1EW