Customer guide to annuities. Understanding your options

Transcription

1 Customer guide to annuities Understanding your options

2 { 2 This guide is intended to provide an overview of your options at retirement, explain the various products available and point out their main advantages and disadvantages. }

3 Contents 4 Exploring your options at retirement 5 Your rights 6 Things to consider 8 Different annuity products available 10 Additional annuity options 13 Considering inflation 14 How long will you be in retirement for? 16 Why professional advice? 17 Process of buying an annuity 19 Questions and answers 21 Glossary { If you re unsure about anything you read in this brochure please contact your financial adviser. } You can get this and other documents from us in Braille, large print or on audio by contacting your financial adviser. 3

4 Exploring your options at retirement As you re reading this guide, it s likely that you re getting close to your retirement. After years of hard work providing for yourself and your family, you must now think about the income you ll get for the rest of your life. We hope this guide will familiarise you with the issues, and give you confidence when making the transition from earned income to retirement income. As you approach retirement, you ll be faced with many decisions and it s vital that you choose the most appropriate options to suit your individual needs. Many decisions that are made at this point can t be changed, so care and planning are vital. At the back of this guide, you ll find a question and answer section and a glossary, which will help you in what can be a minefield of information. Not only does the glossary explain some terms that are contained in this guide, but it also covers some of the most common terminology that you may come across throughout the retirement process. Many people don t know where to start when it comes to planning for their retirement; don t worry if you re one of them, it is an area that can appear to be daunting. This guide is intended to give a user-friendly overview of the various products available, and to explain the main differences between them, pointing out the advantages and disadvantages. 4 After reading this guide, you should speak to your financial adviser. You can use this guide in the initial meeting with your adviser to discuss the options available, as well as discussing anything that you don t understand with them.

5 Your rights When taking your retirement benefits, you have the following rights: Choosing when to take your benefits. Most pension schemes allow you to start taking retirement benefits from age 55 and you don t always have to retire to do this. Some existing pension providers may impose a penalty for taking the benefits before your normal retirement date, but with other providers, there may not be a charge. Choosing how to take your benefits. By using the open market option, you have the right to shop around the whole retirement market to find the best and most appropriate annuity to buy. When considering your options, it s important to get a variety of quotes to compare. { Taking tax-free cash. Most pension schemes allow you to take a tax-free cash lump sum of up to 25% of the value of your pension fund. You don t have to take this payment, or you can choose to take a proportion of this. How much tax you pay depends on your personal circumstances. Any references we make to taxation are based on our understanding of current legislation and HM Revenue & Customs practice, which can change. It s strongly recommended that you speak to your financial adviser, who will advise you on the most suitable package so that it can be tailored to meet your individual needs. } 5

6 Things to consider Did you know? You don t have to buy an annuity from your current pension provider. There are two key ways in which you can buy an annuity if you don t want to accept the one on offer. Firstly, you can use your open market option to shop around for the best product. Under this option, you take your tax-free cash lump sum from your current pension provider, but buy the annuity from a provider of your choice. All defined contribution schemes contain this right by law, so talk to your current pension provider to discuss how you can use this. Alternatively, you can transfer your entire pension fund to another chosen provider. You will then become a member of a new pension scheme, and they will pay you your tax-free cash lump sum and annuity. You don t have to buy an annuity straight away. If you don t want a lifetime annuity or if you decide to delay buying one, there are a few other options you might consider. Because everyone s finances are unique, some products are only likely to be suitable if you have a large pension fund or other assets or sources of income, and are comfortable taking some risk with your fund. During the fact find with your financial adviser, your attitude to risk will be discussed and will help you decide which options are best for you. 6

7 Health conditions could provide you with more income. You may be able to benefit from an enhanced annuity (also called an impaired life annuity), this depends on your state of health or lifestyle and pay a higher income than a standard rate annuity. Even if you consider yourself to be healthy, if you smoke, are overweight or are on any medication, you should let your financial adviser know as it could boost your retirement income. There are hundreds of qualifying conditions. If you are not sure whether something qualifies, please don t hesitate to ask you financial adviser. The following list shows the most common conditions: It s impossible to give an exact list of conditions and lifestyle factors covered as it depends on the stage and severity of the condition. The information you give helps to build up a complete picture for the underwriting process and in some circumstances, the increase to rates could be 100% so it s very important to tell your financial adviser all aspects of your health. Annuity rates are based on you answering all questions accurately and honestly, if your annuity provider checks for appropriate evidence (from your GP for example) and it cannot be supported, they have the right within 6 months to reduce your annuity income. Heart conditions Stroke Cancer Diabetes Multiple sclerosis Parkinson s disease Kidney disease High cholesterol Lifestyle factors include: Smoking, including cigars Obesity { } An enhanced annuity pays higher levels of income for those whose life expectancy is statistically lower than that of the general population. Lung disease High blood pressure 7

8 The different products available Drawdown Instead of buying a lifetime annuity, you could draw an income using Flexible Drawdown or Capped Drawdown. These are ways to receive an income from your pension fund while leaving it invested. With Flexible Drawdown, there is no annual limit of drawdown pension you can take, although you must be getting a minimum income of 20,000 a year to qualify and it must be sustainable throughout the life of the policy. With Capped Drawdown, this minimum amount doesn t apply but there is a limit on the annual amount you can take. Both types are taxed as pension income. You can then choose to buy a lifetime annuity at a later stage of your retirement. Fixed term annuities These provide you with a fixed income for a fixed term. You receive a guaranteed lump sum at the end of the fixed term which may be used to: Buy an annuity if your health deteriorates, you may then qualify for an enhanced annuity Transfer to a drawdown pension if your circumstances change you may benefit from more flexibility Buy another fixed term annuity to maintain flexibility for a further period For more information, see our customer guide for our fixed term annuity called the Protected Retirement Plan. 8

9 Flexible annuities (also called third way products) These products have been designed to bridge the gap between the security of lifetime annuities and a potentially risky drawdown pension. They pay a regular income and may offer guarantees of either investment growth or the amount of pension fund you will receive. They vary in what they re called, including with-profits, unit-linked and flexible/variable (also referred to as third way ). They also vary in the guarantees they offer and the charges they make to cover the cost of guarantees. However, you generally have to give up some investment growth potential to pay for the guarantees. Pension splitting You can also choose to split your pension fund into different portions. You can then choose different options with each portion, or you could leave some portions alone until later. Lifetime annuity This transforms the savings built up in your pension scheme into an income for the rest of your life, it s a kind of insurance policy to ensure you don t run out of money if you live longer than expected. The income you receive from your annuity is taxable in a similar way to earned income. Lifetime annuities are permanent and can t normally be changed at a later date, so choosing the right option is extremely important. You normally have the right to choose which insurer to buy the annuity from and what type of annuity to buy. Choosing the wrong provider or the wrong option could mean you lose out on thousands of pounds of income each year. If you have more than one pension plan or scheme, you might be able to combine them to get a better income, although you don t have to use them all at the same time. { Lifetime annuities are permanent and can t normally be changed at a later date, so choosing the right option is extremely important. } 9

10 Additional annuity options There are different annuity options to suit your needs and circumstances, and your main choices are outlined below. Payment frequency You can choose how often you want to receive your income. Many people choose to be paid monthly because they are used to receiving regular income and may need to use this to help with day-to-day living expenses. However, there are other options, usually quarterly, half-yearly or yearly. You can also opt for the money to go into your bank or building society account at the start (in advance) or the end (in arrears) of each period. Being paid yearly in arrears will give you the highest income, as this gives the annuity provider more time to invest your funds and you may receive fewer payouts in total. Similarly, yearly in advance will provide the lowest income. The last income payment you receive will normally be the one paid immediately prior to your death. However, if you choose to receive your income in arrears, you can sometimes opt for a final payment to be made after your death. This will cover the period of time from 10 your last income payment to your date of death. This option is called with proportion. For this feature you must select this option when you buy your annuity and it will slightly reduce your starting income. Payment guarantee period You can guarantee your annuity for a specific number of years. This means the annuity provider will continue to pay the income for a specified period, even if you die before the period is up. For example, if you were to select a five year guarantee, and die after three years, the annuity would continue to be paid for a further two years to a chosen benefactor. You will need to confirm this preference when you buy your annuity. If any payment under a guarantee period is made as a lump sum, it s subject to a tax charge of 55%. Selecting a payment guarantee period is likely to reduce the income you initially receive from your annuity, but it guarantees that payments will continue to be made for a set number of years, if you die before this ends.

11 Value protection Value protection is a way of protecting the value of your annuity should you die earlier than expected. If you select this option, your annuity provider will pay the balance of the amount protected to your beneficiaries as a lump sum. The exact lump sum payable will be the initial amount used to buy your annuity (or you could elect to protect a proportion of this amount), less the sum of all payments made from the annuity. Any lump sum payable will be subject to a tax charge of 55%. Selecting value protection is also likely to reduce the income you initially receive from your annuity, but it allows you to be sure that your beneficiaries will receive good value from your annuity, if you die. Dependant s annuity You can normally choose whether your annuity just pays an income to you until you die, or also pays an income to a dependant after that. If you don t choose a dependant s annuity, your annuity will normally stop paying out income when you die (although payments may continue for a limited time if you have chosen a payment guarantee period). This option may be appropriate for you if you don t have any financial dependants or they don t rely on you for income (for example, if they have their own pension arrangements). However, if other people are also likely to depend on your annuity income, you may want to consider a dependents annuity. { } Did you know? In some circumstances, it s possible for the income payable under a payment guarantee period to be paid as a lump sum. If you choose a dependant s annuity, your annuity will pay you an income for the rest of your life. However, after you die, it will continue to pay an income to your spouse, civil partner, someone dependant due to disability or a financial dependant(s) for the rest of their life as well. It can be set up to pay them the same income that you were receiving, or a proportion of it. Selecting a dependant s annuity is likely to reduce the amount of income you ll receive from your annuity, as your annuity provider will take into account the additional payments that may be made to your dependant after you die. If you choose to select both a dependant s annuity and a payment guarantee period, it s possible that payments would be payable under both options at the same time. This is called with overlap. However, you can specify that the dependant s annuity should only start after the payment guarantee period has stopped. This is called without overlap, and is unlikely to reduce your income by as much. 11

12 Yearly increases You can normally choose whether you would like to receive a fixed income for the rest of your life, or whether you would like it to change each year. Your main options are: Level annuity this pays out the same income, year after year, throughout your life. The income is fixed and guaranteed never to fall. However, the purchasing power of this income is likely to fall over time due to the impact of inflation Increasing annuity this type of annuity generally has a lower starting income than a level annuity, but will increase each year. You can choose how you would like your income to increase each year. For example, it could increase by: -- A fixed-rate your income increases each year by a fixed rate (for example 3% or 5%). The income is Or guaranteed never to fall but the purchasing power of it may vary according to how high inflation is -- RPI-linked or CPI-linked your income goes up or down in line with the yearly change to the Retail Prices Index or Consumer Prices Index, which are two common measures of inflation Investment-Linked Annuity this type of annuity invests your pension fund in a range of assets, such as stocks and shares, and the income you receive depends on how well these investments perform. This means that you could continue to benefit from stock market investments after retirement but there is also the risk that the value of your investments, and hence your income, could fall. There are two types of investment linked annuities: -- With-profits annuities your pension fund is invested in the annuity provider s with-profits fund, and your income is linked directly to the performance of this fund. This means that your income may go up or down, although most providers specify a minimum income amount that they will guarantee to pay. -- Unit-linked annuities your pension fund is used to buy units in one or more investment funds, and your income is linked directly to the investment performance of these funds. You can usually choose the types of fund, for example a medium risk managed fund, a higher-risk equity fund, and a tracker fund. There aren t usually any guarantees associated with these types of annuities, so your income will go up or down depending on the investment performance of the funds. 12

13 Considering inflation If you buy a level annuity, the income you receive will be guaranteed to stay the same each year. On face value, it would seem that there is no risk. This is not the case, as inflation will eat away at the real value. It s therefore very important to consider the future value of your income when you choose which retirement products to buy. An RPI-linked or CPI-linked annuity will help ensure that your income maintains its real value. However, this will significantly reduce the income you initially receive. Therefore, you may want to consider choosing another type of escalation, or making provision for the effects of inflation outside your pension scheme altogether. Your financial adviser will be able to explain all your options to you, and help you make the right decisions based on your personal circumstances. Did you know? If prices were to rise at 4% each year for the next 20 years, the purchasing power of your income would more than halve and you would need double the income in 20 years time to buy the same amount of goods and services that you could buy with your income now. 13

14 How long will you be in retirement for? People today are generally living longer than previous generations and are enjoying much more active and expensive lifestyles. This makes planning for the prospect of a longer retirement a necessity. It s therefore important to ensure you are still achieving the income you require to suit your standard of living. The table across illustrates that life expectancy in the UK has reached its highest ever level for both men and women. Life expectancy at birth in the UK has reached its highest level on record for both males and females. A new born baby boy could expect to live 78.7 years and a new born baby girl 82.6 years if mortality rates remain the same as they were in Based on mortality rates, a man aged 65 could expect to live another 18.2 years, and a woman aged 65 another 20.8 years. { 14 Did you know? } If you re healthy and retire at age 65, you could expect on average to live for around another 20 years. If you retire even earlier, the years you have ahead could be as long as your working life, or even longer.

15 Figure 1: Life expectancy at birth, England and Wales, to Years Did you know? That the chance of surviving from birth to 85 has more than doubled for men over the last three decades from 14% in to 38% in Female Males As people are generally living longer in Britain today than in previous generations, there s a greater need for increased retirement income. Increased longevity also results in a greater need for home care or funds to pay for home improvements, such as getting wheelchair ramps, stair-lifts and handrails installed. Fees may be required to pay for nursing home accommodation Source: Office for National Statistics; Government Actuaries Department, figures published on 21 March

16 Why financial advice? Some of these options can be very complex and require professional advice. Your financial adviser will be able to discuss these options in more detail with you, to establish the most suitable product to meet your personal circumstances. After carrying out a detailed fact find, your financial adviser will be able to offer expert advice and guidance in a number of areas, including: Explaining the type of pension(s) you have and the choices available to you Discussing your existing investments, investment philosophy and determining your attitude and understanding of investment risk Planning for how inflation affects annuities Reviewing your income and expenditure, as well as your assets and liabilities Noting the tax status of you and your spouse/partner (where relevant) Confirming your medical details Establishing your financial objectives 16 Helping you to explore and understand your retirement income needs and how your existing pension and/or annuities or other products can meet these Discussing your retirement plans are you continuing to work after you take you benefits or are you retiring gradually? Finding the best pension income for you and advising on the open market option Answering any questions you may have The fact find and discussion with your financial adviser is very important. It ensures that they can identify the products that will meet your objectives and be the most suited to your needs and specific circumstances. You ll benefit by receiving the most appropriate advice. Retirement is changing and people are living much longer nowadays. You may not want to be locked into lifelong decisions, but be free to reassess your needs and provisions as you grow older. Remember to be completely open and honest with your adviser, particularly about your health. Only then will they be able to guide you to the right decision.

17 The process of buying an annuity The process of buying an annuity is generally the following: 1 Your financial adviser will complete a client fact find, which will provide detailed information about you, your health and your personal circumstances. Your adviser will also ask you to sign a letter of authority, which will allow the company to speak to your existing pension provider(s) on your behalf. 2 After reviewing and discussing the fact find with you, your adviser will identify your needs and will discuss your retirement options with you. 3 Your adviser will then approach your existing pension provider(s) to request information about your current arrangements. This information is likely to include: -- The fund value and transfer value of your scheme(s), and whether there are any penalties for taking benefits. -- What retirement options your current pension provider will offer you. For example, some pension arrangements contain guaranteed annuity rates. These can often provide existing customers with better annuity rates than those available on the open market. -- Your adviser will also request the relevant discharge forms to allow the funds to be transferred to another pension provider, if applicable. Obtaining the information from your existing pension provider is often the longest part of the entire annuity process, and can take several weeks. Therefore, you may be asked to be patient during this period. 4 Once your adviser has received all of the information and correct documentation from your existing provider, they will then obtain annuity quotes from annuity providers using the open market option. Although this part of the process does not normally take long, some companies may ask for a medical report to be received from your doctor before issuing a quote. This normally only happens if you suffer from a significant medical condition, but it can take a while for them to obtain and consider this report. 5 After all of the quotes have been obtained, your adviser will write a suitability report. This is their personalised recommendation to you, and will include the type of annuity they feel you should buy, and who from. The report will take into account all the information provided by you, your existing pension provider and those providing open market option quotations. You should make sure that you re comfortable with your adviser s recommendation, as once your annuity is set up, it can t normally be changed at a later date. This report will also determine whether your annuity purchase will be within your personal lifetime allowance (for most people this is 1.5 million in the tax year , reducing to 1.25 from ). This is the maximum amount of pension savings you are allowed without incurring an additional tax charge. If you are likely to exceed this amount, your adviser will discuss your options with you. Your adviser will also send you the relevant discharge and application forms needed to complete your annuity purchase. You may also be asked to provide additional documentation, such as your original birth and marriage certificates and money laundering prevention documents. 17

18 { It can take several months to choose the right retirement product. Therefore, it s a good idea to approach your financial adviser well before you want to take any benefits. Your financial adviser will need to discuss your personal circumstances with you, and will then approach your existing pension provider. 6 Once all requested documents have been returned, your adviser will then start the process of transferring the funds from your existing provider(s) to the new chosen provider(s). Again, this process can take several weeks to complete. 7 Your existing pension provider(s) should send all the necessary paperwork, and the funds required to buy your annuity, directly to your annuity provider. 18 } 8 When all the documents have been received, your new annuity provider will be able to complete the annuity purchase and send your official policy documentation to you. They may also pay you any tax-free cash lump sum you are entitled to (unless this has already been paid by your existing pension provider), and start your income payments. Please note that if you leave your decision-making until too close to your retirement date, there may be a delay before your first payments. Your annuity provider will deduct the relevant amount of tax from your annuity payments before you receive it, and will send you a yearly P60 tax certificate.

19 Questions & answers Below are some commonly asked questions. However if after having read this brochure there is anything you re unsure about, you should speak to your financial adviser. How do I pay for financial advice? Your financial adviser will give you full details of the cost of providing advice. If you have requested that LV= pay an adviser charge, the amount will be shown in your personal quote. What if my pension fund is only very small? If your total pension savings are 18,000 or less, you can take the whole of your pension savings as a cash lump sum. This is only allowed from age 60 or over. 75% of the fund will usually be taxable. Also if you are aged 60 or over and have a small pension pot with a value of less than 2,000, it may be possible for it be paid as a lump sum. However there are some special rules around this, and not all providers will offer this option to you. So if you are considering this - you should speak to your financial adviser. 75% of the fund will usually be subject to income tax. How can I work out what type of retirement product I need? You have a number of choices to make at retirement, and the best option will depend on your personal circumstances. For example, if you are single, you might choose an annuity which could either be level or escalating. If you have a partner you want to provide for after your death you might include a dependant s annuity. If you like the idea of buying an income without committing to something that may not be suitable in a few years time; a fixed term annuity-style product might be suitable. Your adviser will be able to guide you to the right retirement product and the right option for you. Who could qualify as a dependant? You can only buy a dependant s annuity for a spouse or civil partner, for someone that is financially dependent on you, or for someone dependent on you due to disability. 19

20 Can I provide an annuity for my partner? Yes, but payments would only start in the event of your death. You can apply your fund so that all or part of your annuity continues to be paid to your partner. A partner is someone to whom you are married (this includes civil partnerships) or someone who, in the opinion of the administrator, is financially dependent on you at the date of your death. I m a smoker. Will this affect the annuity rate I ll get? Some insurers will offer you an enhanced lifetime annuity if you re a smoker, or suffer from certain medical conditions. Make sure you tell your financial adviser if you do smoke or have a medical condition, as this could significantly increase your income. When can I buy an annuity? You can buy your annuity anytime from age 55 onwards. Why are there different types of annuity? Different people have different needs in retirement. Therefore, different options have been designed to ensure, as far as possible, you can buy the right product for your individual circumstances. Is it possible to change my annuity later on? No, when you have bought your lifetime annuity, you can t normally change any aspect of it. However, fixed term annuities and drawdown products offer more flexibility. How do I get quotes? Your financial adviser will be able to get all the quotes you need. Don t forget to tell them all relevant information, including your medical details, and personal and financial circumstances. Where can I get more information? Further information on the range of retirement solutions offered by LV= are available from your financial adviser, or from on our website: 20

21 Glossary of terms Benefit Crystallisation Event (BCE) A benefit crystallisation event occurs when you become entitled to receive a benefit from your pension fund. For example, when you take benefits upon retirement and move your funds into drawdown pension, or when you reach age 75 and haven t fully taken your pension benefits as an annuity or scheme pension. When this happens, the total pension funds you take (or crystallise ) will be measured against your remaining lifetime allowance and a tax may be imposed if it s exceeded. Defined Benefit Scheme This is a type of pension scheme that is established by an employer for its staff. In defined benefit schemes, the benefits that employees will receive from the scheme are defined at outset. The benefits are normally based on an employee s length of service and salary. This type of scheme is sometimes referred to as a final salary scheme. Defined Contribution Scheme This is a type of pension scheme where the benefits are not defined at outset. Instead, the amount of benefits available at retirement depend entirely on how much is paid into the scheme, the investment returns and annuity rates when benefits are taken. These types of scheme are sometimes referred to as money purchase schemes. All personal pensions and some occupational pension schemes are defined contribution schemes. Enhanced Annuities These are annuities that pay higher levels of income for those whose life expectancy is statistically lower than that of the general population. Qualification for enhanced annuities (also known as impaired life annuities) vary, but could include lifestyle factors such as smoking, being overweight and occupation, or medical conditions from diabetes to cancer. Guaranteed Annuity Rate (GAR) Some older style private pension contracts have a Guaranteed Annuity Rate at retirement. Because annuity rates were much higher when these pensions were originally set up, the guaranteed annuity rate could give a significantly higher retirement income than the best annuity on today s open market. So before using the open market option it s vital to check if your pension has one. Guaranteed Minimum Pension (GMP) The minimum benefit that a defined benefit scheme must provide, as a result of being contracted out of the State Earnings Related Pension Scheme (SERPS) before 6 April Lifetime Allowance The maximum value of pension benefits an individual can draw from all their registered pension schemes without incurring an additional tax charge (for most people this is 1.5 million in the tax year , reducing to 1.25 from ). Market Value Adjustment (MVA) (sometimes also called Market Value Reduction) This is a penalty sometimes applied to with-profits funds which are surrendered or transferred out either before or after a member s retirement date. If you have either a With Profits Personal Pension or retirement annuity contract (the old style personal pension) then you should be aware that currently certain companies might apply an MVA on with-profits funds. It is important to take advice on this aspect before taking pension benefits. 21

22 Occupational Pension Scheme This is a pension made available through, and sponsored by, your employer. Such schemes are set up under trust and may operate on either a defined benefit or defined contribution basis. Open Market Option (OMO) Your right to shop around to see the rates or arrangements other annuity providers can offer. Pension Commencement Lump Sum (PCLS) For most pension schemes, you are entitled to receive a tax-free cash lump sum of up to 25% of the value of your pension. You do not have to take this payment or you can choose to take a proportion of this. Personal Pension Plan A defined contribution pension, owned by you, into which you and/or your employer make contributions. Stakeholder pensions are a type of personal pension. Purchased Life Annuity (PLA) These are annuities that are purchased using you own personal non-pension assets. RPI-linked and CPI-linked The RPI and CPI are two common measures of inflation that annuity income can be linked to go up or down with. The RPI (Retail Price Index) is a general purpose domestic measure of inflation in the UK. The CPI (Consumer Price Index) is a general purpose domestic measure of the cost of good bought by an average household in the UK. 22

23 { If you are unsure about anything you read in this brochure please contact your financial adviser. } 23

24 Liverpool Victoria Friendly Society Limited, Keynes House, Tilehouse Street, Hitchin, Herts. SG5 2DX LV= and Liverpool Victoria are registered trademarks of Liverpool Victoria Friendly Society Limited (LVFS) and LV= and LV= Liverpool Victoria are trading styles of the Liverpool Victoria group of companies. LVFS is authorised by the Prudential Regulation Authority, and regulated by the Financial Conduct Authority and the Prudential Regulation Authority, register number NM Pensions Trustees Limited, (registered in England No ), act as Trustees and Scheme Administrators. Authorised and regulated by the Financial Conduct Authority, register number Registered address for all companies: County Gates, Bournemouth BH1 2NF. Tel: /14