Conventional Lifetime Annuity Options Your Questions Answered

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1 Conventional Lifetime Annuity Options Your Questions Answered am-5.30pm weekdays. Calls may be recorded for training and monitoring purposes.

2 Contents 1. Introduction to your retirement options 1.1 Some commonly used terms and what they mean 1.2 At what age can I access my pension benefits? 1.3 What benefits can my pension provide? 1.4 How much tax-free cash can I take? 1.5 How can I take an income from my pension fund? 1.6 What is a Conventional Lifetime Annuity? 1.7 How much can I take from a Conventional Lifetime Annuity? 1.8 Are there any other ways I can take an income form my pension fund? 1. Will I have to pay tax on my pension benefits? 1.10 How can 425 Financial Solutions help me to shop around for the best annuity rate? 1.11 For how long is my quotation valid? 1.12 Can I change my mind? 1.13 How long will it take to process my application? Choosing your conventional lifetime annuity options 2.1 What if I am in poor health or a smoker? 2.2 Does my occupation make a difference? 2.3 Can I provide a pension for my spouse or civil partner? 2.4 Can I provide a pension for my children? 2.5 Can I protect my annuity income against inflation? 2.6 Can I guarantee that my annuity income will continue to be paid after my death? 2.7 How often will my pension be paid? am-5.30pm weekdays. Calls may be recorded for training and monitoring purposes.

3 1. Introduction to your retirement options This guide sets out the most common questions and answers about your retirement options. If you ve decided to purchase a conventional lifetime annuity, and have been sent a Conventional Lifetime Annuity Request form, this guide will also help you choose which income options you d like. Where relevant, we ve cross-referenced the guide with the form to help you. If you have any questions not answered here, your 425 Financial Solutions agent will be pleased to assist you. 1.1 Some commonly used terms and what they mean Please see below for some commonly used words and expressions used within this booklet; Pension Annuity The word pension can sometimes have two meanings: Either: to describe the investment fund in which you have built up a lump sum of money to provide for your retirement Or: to describe the income you receive in retirement In this document we will use the word pension to describe the investment fund. This is the fund you have been saving into, either through regular contributions or lump sums from time to time. Your money will have been invested in one or more tax-efficient funds with the aim of providing investment growth to help provide you with money for your retirement. There are a number of different ways you can access the benefits built up in your pension fund. There are also some restrictions set by the government. An annuity is a product purchased with the lump sum in your pension fund. The annuity will pay out a regular income for an agreed period of time. How much income you can buy is agreed at the outset and the basis of that agreement won t change throughout the term of the annuity. Some of the different types of annuity you might hear about include: conventional lifetime annuity, compulsory purchase annuity, purchased life annuity, flexible annuity (sometimes called variable or third way annuity), and fixed term annuity. This guide only deals with conventional lifetime annuities, however we can provide you with advice on all of your options if you wish. Conventional Lifetime Annuity A conventional lifetime annuity is an annuity purchased with the lump sum in your pension fund. This type of annuity will pay out a regular income for the rest of your life. It can also continue paying out after your death for a period of 3

4 time, or to your spouse, civil partner or dependant, if you choose these options at the outset. How much income you can buy is agreed at the outset and the basis of that agreement won t change throughout the term of the annuity. Annuity Rate When you purchase an annuity, the amount of income you will receive is determined by the rate set by the provider. The rate is based on the provider s statistical calculations of how long they would typically expect to pay out, based on factors such as your age, health and occupation. Different providers will pay different annuity rates. Some pension funds carry a guaranteed annuity rate. This means that the pension provider guarantees the rate that you will get, even if the market rate is lower. If the market rate is higher, you can still shop around for the best annuity rate. Open Market Option Instead of simply taking the annuity income offered by the provider of your pension fund, you can shop around and choose to transfer your pension fund to another provider offering a better annuity rate for a Conventional Lifetime Annuity. This is known as exercising your Open Market Option. Tax-Free Cash Most pension schemes allow you take a one-off tax-free cash lump sum from your pension fund once you have reached age 55. Usually this is up to 25% of the fund, however some pensions might restrict this to a smaller amount. Your pension provider will be able to tell you how much tax-free cash you can take. If you have an occupational pension you might be entitled to a higher amount than 25% and you should check this with your employer or pension provider. Tax-free cash from pension funds is sometimes also called a pension commencement lump sum. Pension Commencement Lump Sum See Tax-Free Cash Dependant Your dependant is usually your spouse (which means husband or wife) or registered civil partner, however it also includes any child under the age of 18 or still in full time education, or any person who is financially dependant on you. 1.2 At what age can I access my pension benefits? The pension fund that you have built up can be used to provide you with retirement benefits at any time from age 55 onwards and you don t have to retire to start taking these benefits am-5.30pm weekdays. Calls may be recorded for training and monitoring purposes.

5 1.3 What benefits can my pension provide? There are two main options: 1. You can take out a cash lump sum; 2. You can take an income. This can start straight away or at a later date. There are various ways you can take an income. In this guide we just look at Conventional Lifetime Annuities. If you would like to discuss alternative ways of taking an income from your pension, our financial advisers will be pleased to help you. If you are aged at least 60, you can take up to three pension funds each valued at no more than 10,000 as a lump sum, 25% of the sum you receive is paid tax-free and the remaining 75% will taxable as earned income. If you are aged at least 60 and your pension funds added together total no more than 30,000, then you may be able to take all of your pension funds as a cash lump sum. This arrangement is known as trivial commutation, 25% of the sum you receive is paid tax-free and the remaining 75% will be taxable as earned income. You should speak to your pension provider if you think this may apply to you. 1.4 How much tax-free cash can I take? Most pensions allow you to take up to 25% (one quarter) of the value of your pension as a tax-free cash lump sum. However, for some types of pension the tax free cash might be more or less than 25%. For example, some pension funds provide guaranteed minimum levels of income and this might restrict how much tax free cash you can take. Alternatively, if you have an occupational pension you might be entitled to a higher amount and you should check this with your employer or the pension scheme provider. Although many people do choose to take the full amount of tax-free cash available, this choice might not be suitable for everyone. You should remember that if you choose to receive part of your pension fund as a cash lump sum it will leave you with a smaller pot of money with which to purchase your retirement income and so your pension income will be reduced as a result. 1.5 How can I take an income from my pension fund? For the majority of people the most common way of generating an income from their pension is to purchase an annuity. This guide looks only at one type of annuity, known as a Conventional Lifetime Annuity, however we can provide you with advice on all of your options including other types of annuity, if you wish. Besides annuities, there are other options for taking income either immediately or at a later date that you might wish to consider. For example, you might wish to defer buying an annuity and instead take an income directly from your pension fund. This can be a complex area for which you are likely to need financial advice. 425 Financial Solutions Advice team, comprising experienced independent financial advisers, will be pleased to help you. They can be contacted on the phone numbers below. 5

6 1.6 What is a Conventional Lifetime Annuity? A conventional lifetime annuity is a product purchased with the lump sum in your pension fund. The annuity will pay out a regular income for the rest of your life. It can also continue paying out after your death for a period of time, or to your spouse, civil partner or dependant, if you choose these options at the outset. How much income you can buy is agreed at the outset and the basis of that agreement won t change throughout the term of the annuity. Once you have purchased an annuity you cannot change your mind, so it s important that you shop around before deciding, to find the best income you can. 1.7 How much income can I take from a Conventional Lifetime Annuity? The amount of income you receive will depend on a number of factors, such as: how much money is used to buy the annuity; whether any special terms apply, such as a guaranteed annuity rate or a guaranteed minimum pension your age at outset (the older you are, the higher the income, generally); your health at outset (if you are in poor health you may qualify for a higher income); your occupation (some occupations qualify for a higher income) whether you choose at outset to add on an income for your surviving spouse/civil partner or dependants(s); whether you choose at outset to have the payments guaranteed for a period of time; whether you choose at outset to have a level or increasing income; whether you choose at outset to have your income paid in advance or in arrears 1.8 Are there any other ways I can take an income from my pension fund? Financial Solutions Compare & Buy team can only help you to source and arrange one particular type of annuity called a Conventional Lifetime Annuity. This is the type of annuity most people choose for their pension income, however, it isn t necessarily suitable for everyone so you should check whether it s suitable for you. The decisions that you make about how to take an income from your pension are binding and irreversible, so it s important that you explore all your options before deciding, to find the best arrangement for you. Besides annuities, there are other options at retirement that you could consider. For example, you might wish to defer buying an annuity and instead take an income directly from your pension fund. This can be a complex area for which you are likely to need financial advice. If your pension fund has to provide a guaranteed minimum pension (GMP) you might wish to consider whether to preserve the GMP or look at alternatives. If you would like advice on other types of annuity or your other retirement options am-5.30pm weekdays. Calls may be recorded for training and monitoring purposes.

7 Financial Solutions Advice team, comprising experienced independent financial advisers, will be pleased to help you. They can be contacted on the phone numbers below. 1. Will I have to pay tax on my pension benefits? If you take income from a conventional annuity, the income is liable to income tax at your individual tax rate and will be taxed at source by the annuity provider. If you take income from your pension by a different method, the tax treatment will depend on the type of arrangement. This is a complex area for which you will probably need financial advice. If you select annuity value protection and a lump sum is due to your beneficiaries the lump sum will be taxed before it is paid out, currently at a rate of 55%. It will not then form part of your estate for inheritance tax purposes. Any income payments due during a guarantee period (If you have selected this option), will form part of your estate and could be liable to Inheritance tax. If your pension provision added together is close to, or more than, a certain limit called the Lifetime Allowance ( 1.25 million in the 2014/15 tax year) then there are a number of rules and limitations on how your benefits can be taken and some tax implications. This is a complex area of financial planning and your 425 Financial Solutions Advice team will be pleased to help you. They can be contacted on the phone numbers below How can 425 Financial Solutions help me to shop around for the best annuity rate? 425 Financial Solutions Compare & Buy team will use our extensive knowledge of the conventional lifetime annuity market to search for the best rates available based on the information you provide and the options you choose. You ll have your own dedicated agent who will be your sole point of contact the whole way through the process. We will need information about your existing pension funds and we ll ask you some questions to help understand your requirements. We will use this information to filter the search results. We will then provide you with the top conventional lifetime annuity quotes that we can find and discuss the various options with you, to help you make informed choices. We will send you the quotations in writing together with information about your next steps. Once you ve made your final selection we will then help you with the paperwork and deal with the product provider on your behalf. The process of arranging your conventional lifetime annuity and/or any tax-free cash typically takes 4-6 weeks from start to finish but we ll keep you informed of progress at every step of the way. Alternatively if, at any time, you would prefer to explore other retirement options or would simply like financial advice on the best course of action for your needs and objectives then 425 Financial Solutions Advice Team comprising expert independent financial advisers 7

8 will be happy to assist you and can be contacted on the phone numbers below For how long is my quotation valid? Most providers only guarantee their annuity rate quotations for a short period of time, typically between 10 and 30 days depending on the provider. During this time the new provider will expect to receive a completed application form, including information directly from your current pension company and the pension fund value. If these requirements are not met you may be provided with a new quotation and you might find that the annuity rate quoted has increased or decreased. The transfer value of your pension fund is not guaranteed, and its value could increase or decrease during the intervening period. The exact transfer value of your fund will only be known on the date the transfer to the annuity provider takes place Can I change my mind? Most pension providers will allow you 30 days from the date you sign the application form in which to change your mind. If they don t hear from you within 30 days then the annuity will continue. This is why it is so important for you to take the time to shop around and find the best annuity rate that you can before making any decisions. Once you ve made your decision, sent back the application form, the 30 days have elapsed and the annuity has been set up, your decision will be final. You will not then be able to change your mind and you won t be able to switch to a better rate afterwards. 425 Financial Solutions can help you shop around or if you need advice we can recommend a suitable course of action for you. Call us on the phone numbers below How long will it take to process my application? Once you have made your decision and submitted an application form, it is normal for the processing of a conventional lifetime annuity to take 4-6 weeks. This is because once you have decided your annuity options and whether you want to take any tax free cash we need to contact your pension provider and arrange for the funds to be transferred to your annuity provider. This can mean that there is a delay from the time when your income is due to start to the date you actually receive your first payment. If there is a delay, please don t worry; we will be doing all we can to ensure your annuity provider sends your first payment as soon as possible. Because it can take this long to process it means the transfer values and annuity rates are not guaranteed and not all annuities can be backdated to the actual retirement date. For these reasons we recommend that you complete and return the paperwork to us as soon as possible am-5.30pm weekdays. Calls may be recorded for training and monitoring purposes.

9 2 Choosing your conventional lifetime annuity options 2.1 What if I am in poor health or a smoker? If you smoke (or have recently given up) or are in poor health, many annuity providers could offer you a higher level of income using an enhanced or impaired life annuity than you could receive under a standard annuity. The amount of extra income will depend on your life expectancy and your case will be underwritten on an individual basis. This means the higher the risk from your health or medical condition, the higher the annuity payment. Once you have arranged your annuity it is an irreversible decision, so if your health is poor, or you are a smoker, you should investigate this option before making any decisions on which annuity you will have. 2.2 Does my occupation make a difference? Yes, some occupations can qualify for a higher level of income, again using an enhanced or impaired life annuity, than you could receive under a standard annuity. It is worth checking to see if you could qualify for a higher income because of your occupation. Remember, once you have arranged your annuity it is an irreversible decision, so you should investigate if your occupation qualifies you for a higher income before making any decisions on which annuity to have. 2.3 Can I include a pension for my spouse or civil partner? You can choose between a single life pension or a joint life pension. A single life pension will be paid to you for your lifetime, but will stop on your death. A joint life pension will provide you with a pension for your lifetime and on your death, provide a second pension to your spouse or civil partner for their lifetime. It can be at the same level as your pension or a percentage of the pension being paid to you at the time you die. If you have an occupational pension arrangement the maximum may be limited to two thirds. You may also be able to arrange for your spouse s or civil partner s pension to stop on his or her remarriage or new civil partnership. 2.4 Can I provide a pension for my children? Your dependants are usually your spouse (husband or wife) or registered civil partner, however the term also allows you to provide a pension for any child under the age of 18 or still in full time education, or any person who is financially dependent on you. If this is the case, it may be possible to arrange for a dependants pension to continue to be paid to them after your death. A pension provided for your children will stop when the youngest child reaches 18 or leaves full time education. 2.5 Can I protect my annuity income against inflation? Yes. As years pass, and the cost of living goes up, the effect of inflation could reduce the spending power of your annuity income. With a level income the amount of income you receive is fixed so you will always know how much you will receive, but over time as retail prices gradually increase you will not be able to buy as much with it.

10 10 If you choose an increasing income this means to start with you will receive a substantially lower income than you would receive from a level pension. The higher rate the rate of increase you choose, the more this will reduce the initial income you can receive. If you then live for a long time you could receive more over the lifetime of the annuity than you would from a level income. However, it could take some time (in other words you would have to live long enough) to recover the difference. If you would like your income to increase with inflation, we can arrange for it to increase by a certain amount each year. The most common options available for an increasing income are: No escalation (in other words, a fixed level of income in retirement) A fixed rate of 3% Linked to the limited prices index (LPI) Linked to the retail prices index (RPI) A fixed rate of 5%. Alternatively you can choose a different rate if you wish. Whichever rate you choose this will be fixed throughout your retirement. ** The Retail Prices Index (RPI) and the Consumer Prices Index measure the changes from month to month in the cost of a representative basket of goods and services bought by consumers within the UK. * The Limited Prices Index (LPI) is usually the lesser of the annual increase in the Retail Prices Index (or Consumer Prices Index) and 5%. If you choose RPI-linked increases your income will decrease if there is deflation. If you choose LPI-linked increases your income will NOT decrease if there is deflation. (Deflation is where there is a general decline of prices in an economy.) 2.6 Can I guarantee that my annuity income will continue to be paid after my death? Yes you can, however this is not automatically built into your annuity payments. Your pension income from a conventional lifetime annuity will be payable to you for life which means it is designed to stop on your death. You can choose whether to include a feature which will either protect the residual value of the annuity if you die, or guarantee that annuity payments on your life will be paid for a set period of time. Annuity value protection Annuity value protection will ensure that if you die without having received payments equal to the full value of your pension fund, then a lump sum will be paid to your beneficiaries. Alternatively, if applicable, you can choose for the lump sum to be paid out on the death of your surviving spouse, civil partner or dependant. You can choose how much of the pension fund you want to protect, up to 100%. The lump sum payable when you die is the percentage of your pension fund that is protected, less the total gross income already paid to you as an income. If the total income paid out is more than the protected amount, no lump sum will be paid am-5.30pm weekdays. Calls may be recorded for training and monitoring purposes.

11 Any lump sum paid out as annuity value protection will be taxed (currently at the rate of 55%) before it is paid to your beneficiaries. Some providers limit annuity value protection so that it is only payable if you die within a certain time period, such as before your 75th birthday. Value protection annuities tend to be more expensive than conventional annuities and therefore the starting level of annuity is likely to be lower. Currently only a limited number of providers offer value protection. Guarantee period As an alternative to annuity value protection you can choose to guarantee that your income will continue to be paid for an agreed period, usually 5 or 10 years. This means that if you die during the guarantee period, your annuity income will continue to be paid to your estate until the guarantee period ends. For example, if you have a guarantee period of 10 years and you die after 8 years, your pension will continue to be paid to your estate for a further 2 years. If you have a joint life pension and you die within the guarantee period and your spouse/ civil partner or dependant is still alive, you can choose for the dependant s annuity income to be either: With overlap, which means the pension will start from the next date a payment would have been made to you. Without overlap, which means his/her pension will start from the next payment date after the guarantee period of your pension ends. The majority of providers will not allow both a guarantee period and value protection in the same annuity. 2.7 How often will my pension be paid? You can choose to have it paid monthly, every 3 months (quarterly), every 6 months (halfyearly) or once a year (annually), depending on your particular requirements. You can also choose to have it paid either in advance or in arrears. It s entirely up to you. In advance means that we can arrange for your income payments to be made at the start of the period you ve chosen, whether that s monthly, quarterly, half-yearly or annually. In arrears means that you will receive your income payments at the end of the period you ve chosen, whether that s monthly, quarterly, half-yearly or annually. If your income is paid in arrears you can choose whether to have a proportionate payment made on your death. If selected, this means the final payment will be calculated to take account of the date of death and the number of days left before the full amount is due. Choosing not to have this option means no further payments would be paid on death. Selecting a proportionate payment will result in a lower income than choosing not to include it. For this reason you should consider your personal and family circumstances when deciding whether or not to include this option on payments in arrears. 11

12 Interested in finding out more? Please call us today on: Free from most UK landlines Local rate from UK landlines and mobiles. Also included in free call packages. Or visit us at to find out more and request a call back. Lines open am-5.30pm weekdays. Calls may be recorded for training and monitoring purposes. 425 Financial Solutions, Queen Square, Bristol BS1 4NT (am-5.30pm weekdays) 425 Financial Solutions is a trading name of 425 Direct Limited. Registered office: Queen Square, Bristol BS1 4NT. Registered in England and Wales No Authorised and regulated by the Financial Conduct Authority. Calls may be recorded for training and monitoring purposes. 425 AQA 10.14

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