Annuities Guide. Simply Retirement make it easy for you to find the best deal in retirement. Simply Retirement Ltd who are we? Who is this guide for?

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1 Simply Retirement make it easy for you to find the best deal in retirement Jan Leeming Annuities Guide Simply Retirement Ltd who are we? Thank you for requesting this annuity guide. I would just like to take a moment to tell you a little bit about us. Simply Retirement are members of a professional body, offering qualified, independent financial advice from the whole of the market. We are specialists in retirement planning and have access to rates that may not be generally available. We can arrange your annuity for you and find you the best rates in the market. Because we can receive our money from the insurance company (commission), there is no additional cost to you. If you arrange the annuity yourself, your provider just keep the extra cash and you have to deal with all the paperwork yourself! Introduction Remember, you do not need to buy your annuity from your pension fund provider. Shopping around can mean you could get 33% more income, for the rest of your life. This is called the open market option and your pension company have a legal obligation to offer you this choice. You could get as much as 15%* for a healthy annuity and 33%** for an enhanced annuity. If you have spent years saving into your pension fund it can be a significant asset and you will want to get the biggest income for it. * Source Avelo Exchange these do not compare less competitive rates being offered by companies who do not prospect for annuity business. (21/11/2011) ** Source - Just Retirement (16/9/11). Who is this guide for? Anyone who has built up a pension pot in a money purchase scheme, whether it s private or a company plan. It is not relevant if you have a Final Salary Scheme. What happens to a pension at retirement? If you have paid into a pension plan or a number of different plans, you will have a fund available to provide your income in retirement. You can take your pension from age 55. You do not have to retire or stop work. Many people now work part time as they choose to phase their retirement. Your pension doesn t automatically start paying an income to you. In reality, a pension is just a pot of savings and investments you ve built up over your working life. When you decide to receive an income you are generally allowed to take a tax free lump sum from your pot. This is normally 25% of the fund value. The rest of your funds (75%) need to be transformed into a regular income for the rest of your life. Turning your pot into an income We would normally suggest that you start your planning at least six months before you plan to retire or stop work. However, you might not cease work entirely and many people are choosing to take a retirement income from their pension before they had reached their planned retirement date. This might be because they felt it was a good time to take the income or to support their existing income. Members of a Final Salary Scheme do not have the problem of finding an income because they will have the income automatically paid to them on their retirement date. 1

2 Key Facts What is an annuity? This is basically an income that is paid for the rest of your life. It is a contract with an insurance company. You give them your pension fund and they pay you a guaranteed income until the day you die. Can I take my pension fund myself? No. You can only take your 25% tax free lump sum. The rest must be used to provide you with a retirement income. Must you buy an annuity? No, you do not have to buy an annuity. You could take what s called flexible drawdown or capped drawdown income. However, this has additional risk, especially for those with smaller pension pots less than 80,000. You ll find further details of these options later in this guide. How is it paid? It is paid by the annuity provider (insurer) and is paid monthly, quarterly or yearly. Is the annuity income taxed? Yes, it s taxed in the same way as any other earnings or income. The insurance company will deduct tax based on your tax code and forward it to HMRC. Can I change my mind if it s wrong? No, once an annuity has been set up it can t be changed or cancelled. That s why it s important to get it right. There s no going back. What happens when I die? Unless you have picked an annuity that continues to a spouse / dependent, the income will cease on your death. This applies even if you die after just one year! Is my annuity payment secure and safe? UK regulated insurers are covered by the Financial Services Compensation Scheme. This means that even if the company went bust, 90% of your income is guaranteed. Shopping Around Never simply accept your pension provider s offer There are huge differences between the best-paying annuities and the worst. Just because you have been loyal to your pension company do not think they will reward your loyalty with a good annuity rate. Finding the best deal for your pension income can increase it by 33% Mr Jones, a 65 year old man with a pension pot of 50,000 discovers he could buy an income of 3,145 each year compared with the worst of 2,667. That s a difference of 478 a year. If he lives for the next 25 years that s a total of 11,950. The open market option (OMO) means that you have a legal right to source the best available rate. In fact, there are suggestions that this must be the default option in the future. Sadly, two thirds (68%*) of people opt for their current providers offer. * Source - ABI RESEARCH PAPER NO 23, 2010 Do not accept your insurers offer unless you are sure it s the best. Factors affecting the income you receive (or annuity rate) l The size of your pension fund l Whether you want the income to remain the same or increase each year l If you want to pass any income to a spouse or dependents after your death. l Your health l If you want any bells and whistles What if I don t want to take my income yet? You do not have to take your income and could leave your pension pot to grow (or shrink?). However, delaying buying an annuity means that you will miss out on the income you would have received. Unless you are tactically delaying or using a special type of delaying product, it s usually better to sort-it sooner. Our experience has been that it s worth taking time to make the right decisions but once you have made them, do not delay. Investments have not performed very well in recent years and in conjunction with the fact that annuity rates have continued to fall many people are worse off by having stalled. Annuity rates do get better as you get older, because they expect to make the payments for a shorter period of time. However, the increase in rates because of age is not significant and you need to consider if rates generally will continue to fall. A 60 year old man with a fund of 50,000 could by an annuity of 2,820. If he waited until his 65th birthday his income would rise to 3,145, but he would have missed out on 14,100 of income. He also risks annuity rates falling while biding his time. For every month you delay buying your annuity, you ll lose a month s worth of income. Your pension fund may have to grow significantly to provide you with the same overall income in retirement as the one you could buy today. The rate you get depends on the market Because we are all living longer, this means that annuity providers have to pay out for longer and therefore rates are dropping. We do not have a crystal ball. Annuity rates are a market place and several factors affect what the companies will offer you. The rates move up and down influenced by a number of factors, including what the annuity companies can invest in to provide you with a secure and guaranteed income. In 1990 annuity rates were 15%. They are now closer to 6%, so rates have halved. 2

3 How long will your retirement last? This is a very polite way of asking when will you die? If you knew the answer you could plan appropriately. That s because generally most annuities stop when you die. Therefore, if you die in the first year the annuity has been very poor value for money and your family will not see any of the cash. You may have traded in 50,000 for just 3,000. Again, this is where we need our crystal ball. Typically, in the UK, a man who reaches age 65 lives to age 84 and a woman to age 87. Source DWP, Cohort estimates of life expectancy at age 65 April 2011 What if I can t find my pension plans? If you have lost track of a pension you had we could trace this for you. You can use the Pension Tracing Service on This is a database of pension schemes. If you contracted out of the State Second Pension (formerly known as Serps) you will probably have a stakeholder or personal pension which has received some of your National Insurance Contributions. You will have been employed to do this. If you are not sure you can contact HM Revenue and Customs Contracted Out helpline on to find out. Types of Annuities There are a range of annuities you can buy. Once you have bought your annuity you normally can t change your mind. So make sure your find the right one for you. Put your pension provider s offer to one side. Four months before the retirement date of the policy you will be sent information from your current provider about your pension. Ignore it at this stage. The only reason to opt for your providers default rate is laziness. There may well be a better deal available and we can scour the market for you. Conventional Annuity In a nutshell, you will get a fixed income for life. This income may remain the same (level) or increase each year. Perhaps it could increase by a fixed amount (3% or 5%) or you may choose for it to increase in line with inflation. These annuities have the benefit of certainty, but you no longer gain from the investment of your pension fund. If you want security and you want a low-risk route, this could be the option for you. Simple, secure option. You know what your income will be for the rest of your life. You re locking into the annuity rates available at the time. Once you have made the selection you cannot go back. Investment Linked Annuities (Asset Backed Annuity) This is a simple concept. The amount you get from your annuity depends on the performance of a stock-market type investment. In other words, you re taking the risk that you may get less, but you re hoping for more. However, there will be a minimum limit below which your income can never fall. The argument for this type of annuity is that if you select a conventional annuity that doesn t increase, its actual value each year will be eroded by inflation. Therefore, the things you buy with your income next year will have become more expensive so you can buy less each year. The inflation linked conventional annuity can appear to be an expensive option and the starting income is normally significantly lower (40% less). An investment linked annuity will allow you to select a reasonable amount for your starting income, and then will provide you with the potential for that income to increase, which may offset the effects of inflation to some extent. If we accept that the average male age 65 lives for another 19 years, then this would be regarded as a long term investment. Generally, when investing for the longer term it is stock market type investments that have performed better than the more secure types of investment. Possibility of rising income. There are conditions where you may exit this type of annuity and buy a conventional annuity later. Income levels will fluctuate and reduce in poor investment conditions. You may need other secure income to rely on. Bells and Whistles So, what other choices do you have? Would you like to provide some income for a spouse / dependent in the event of your death? The more features or bells and whistles you select, the lower the income that will be paid to you. Joint Life Annuity If you are married or in a civil-partnership you should consider a joint life annuity. This might be suitable if your partner has no other pension income and relies on your income. You can opt for various percentages for the survivor, such as 100%, 66% and 50%, which are more common. 3

4 Amount per annum Okay, this often causes confusion. An annuity is guaranteed to pay an income for the rest of your life. This is a specific benefit offered in the event of your death. Typically guarantee periods are five (5) or ten (10) years. The reduction in your starting income is not much for this option. The insurer expect you to live for the first 10 years so its not a big risk for them. Basically, you are securing that your income is paid for a set number of years, even if you die. Five (5) year guarantee period - If you die in year two, the payments will continue to be paid to your estate for years three, four and five. Amount per annum , Spouses benefits 2, , Single Life 50% Spouses 66% Spouses Ref: Avelo 30/01/12 Male Age 65, Wife Age 62 Guarantee PEriod No 5 Years 10 Years Ref: Avelo 30/01/12 Male Age 65 2, % Spouses 3, , Escalating Annuities We have already mentioned these. This allows you to select a lower level of starting income that will increase by a known amount each year. This maybe 3%, 5% or by inflation. Inflation is a serious issue for those in retirement. It is measured by the government and it refers to the increase in the amount we pay for goods and services. There is a general figure for inflation that the government issue for the whole nation. They buy a basket of goods and services and then they compare how much more this costs each month. It is referred to as the Retail Price Index (RPI) or Consumer Price Index (CPI). If inflation was 3% every year for 20 years your annuity income would be 57% (almost halved), in respect of what it could actually buy. More detailed research has been conducted to show that the goods and services in the basket are not accurate for someone over the age of 55. Therefore, research by specialist companies looks at Silver RPI. (Probably because after 55 we all have silver hair!). This is much higher than the general RPI figures used. Amount per annum Level Income 3% 5% Escalation Years Ref: Avelo 30/01/12 Male Age 65 So, it would seem sensible to have an inflation linked annuity. However, consider this seriously because they are expensive and your starting income will be seriously reduced. Again, if you die early it will have been even worse value for money. Alternatively, you can look at an Investment Linked Annuity to provide you with the opportunity for an increase in your pension income. Enhanced / Impaired Annuities More income for smokers, those taking medication or with poor health. Poor health means a bigger income because the annuity company calculates on average it wont need to pay out for as long as you re more likely to die earlier. Between 55% and 65% (over half) of people are eligible for an enhanced annuity. It not all about you felling unwell, so check out this option. Source Just Retirement Research Simply Retirement Ltd will hold your hand and assist you with this. Guaranteed Annuity Rates Some of the old types of pension policies can have guaranteed annuity rates. These can vary from company to company and can be very valuable, although they might be very restrictive. For example, they may offer a rate of 11% for a single life annuity. This is very good, but it could only be payable annually at the end of the year. Also, if you need to provide for a spouse, it would not have the flexibility you require. Check wording such as Annuity and Cash Equivalent Sums for 60 to 70 or Basic Annuity a year for each 100 of Basic Cash Accumulation. Often you will find a table with different rates for different ages for every 1,000 saved. These are often not made clear. 4

5 Alternative to Annuities Drawdown Capped and Flexible These are the new terms that were introduced in April There is now no requirement to buy your annuity at age 75. These are considered higher risk and generally not recommended for smaller funds. What it does offer is the ability to defer or not buy an annuity and a certain amount of flexibility and control over your funds. You will need Independent Financial Advice to ensure this type of product is suitable for you. Simply Retirement Ltd can help you here. Just ask to speak to a qualified, specialist adviser. First you start by taking your 25% tax free lump sum from your pension pot. You will then draw an income from the remaining pot (75%). Capped Drawdown You will be allowed to draw an income from your remaining pot (the 75%). There are maximum limits placed on the maximum amount you can withdraw each year. This is broadly equivalent to the amount an annuity would provide. To prevent you running out of money in your old age, the maximum limits are recalculated every three years. You do not have to take any income if you do not want so this could be a method of just taking your tax free lump sum (25%). The amount of income you withdraw can be changed. It is an income tap that can be turned on and off as required. In the event of your death you can pass the fund to a survivor and they have the following three (3) options:- 1) Buy an annuity 2) Continue to withdraw income 3) Take a lump sum, minus 55% tax. Flexible Drawdown This is similar to capped drawdown but if you have over 20,000 of secure guaranteed income from a pension or annuity, you are allowed to withdraw the entire fund, with no limit. It will be taxed as earned income. Advantages and Dis-advantages of Drawdown The value of your pension pot could increase and you retain control of it Your pension fund could pass to the remainder of your family The income withdrawn is flexible. The value of your pension pot could decrease. You may run out of cash before you die. Your eventual retirement income could be lower than if you had bought an annuity. Fixed Term Annuities This allows you to buy your annuity income for a set term. It pays you a guaranteed income (which cannot be altered) for a term you select. The minimum term is normally 5 years. At the end of the term (perhaps 5 years) you have a guaranteed maturity value available to you. You can use this to buy another fixed term annuity or maybe a conventional annuity. This is a useful way to postpone buying an annuity if you think your circumstances could change. This might be that you think your health will deteriorate and you may get an enhanced annuity later. It might be that you want to provide a spouses benefit now, but if your spouse has died before the end of the term you would then buy a single life annuity. Flexibility, potentially a higher income in the future if your health deteriorates You risk annuity rates falling if you decide to buy an annuity at a later date. There is no certainty of income for the rest of your life. 3) How do you get the best rates? 1) Find out what your pension provider offers 2) Contact Simply Retirement Ltd who will research the whole of the market and locate the top available companies for you. Simply Retirement Ltd Unit 1 Harbourland Business Court Boxley Road Maidstone Kent ME14 3DN Tel admin@simply-retire.co.uk As a specialist you may find that we get rates that are not available elsewhere. Using a local or generic IFA means that they will be advising on a range of financial planning and services. This means that they may not be specialist or qualified in certain areas of retirement planning. We can operate on either a fee or commission basis. If you select the commission route, there is no obligation to use us and you will not pay any money from your own pocket. We will only get our commission, paid from the annuity provider, if you choose to proceed. You do not get a better deal by arranging the annuity yourself. It just means the annuity provider keeps all the commission and you have to deal with the paperwork! We have a fully qualified, competent financial adviser who holds the following specialist pension qualifications: G60, JO4, JO5 and CF9. 5