Turning your account into a retirement income BASF UK Group Pension Scheme November 2008
Helping you decide As you approach retirement, you will need to make some important decisions about the type of pension (annuity) you want to buy with your individual Scheme account. You have a number of choices, so it s important that you take enough time to fully understand all the options and choose the product that s right for you. If you re an active member The company runs pre-retirement seminars for members who are 50+ years of age, and closer to retirement will also pay for you to attend a short private consultation with an independent financial adviser (IFA), who will help you make the right decision. Reading this guide will give you a better understanding of the types of annuities available (pages 4-6) and highlight the points you will need to consider as you approach retirement. On pages 8-9 we also explain how you will actually go about buying an annuity. It is a long and complicated process involving several organisations (your HR department, the Scheme administrator, independent annuity advisers and insurance companies) and of course you! Our summary shows who does what at each step of the process, highlighting those times when you need to act promptly to keep things moving forwards. If you re a deferred member BASF will arrange for you to speak to an Origen retirement consultant about your options. Origen s contact details are given on the next page. What could you buy for your money? The table below gives examples of the approximate cost of providing different types of pension, depending on your age at retirement, sex and whether or not a partner s pension is included. Approximate cost of providing a pension Age 55 Age 60 Age 65 Man Woman Man Woman Man Woman a. 10,000 a year (single life) (including RPI increase) b. 10,000 a year (single life) (no increase - level annuity) c. 10,000 a year, plus a 50% spouse s pension on your death (assuming widow is 3 years younger and widower is 3 years older) (no increase - level annuity) 293,801 314,714 251,165 273,707 210,816 223,290 165,571 167,942 152,045 155,434 135,136 142,336 175,825 174,900 164,680 163,705 152,074 150,844 These figures are for illustration only and based on rates at 11 November 2008. They show the possible cost of providing a guaranteed annuity which increases in line with the retail price index (a), as well as the cost of level annuities that do not increase in payment (b & c). They are not in any way guaranteed. The actual cost of your benefits at retirement will depend on the terms available at that time. If you want a current market estimate of what your fund might buy, Origen operates an online Annuity Quotation Service which will provide you with further information. See page 3 for further information. 2
Help and information The pension website is a good source of information about the BASF Scheme, including several other factsheets aimed at members nearing retirement. You can access it at http://ukpensions.basf.co.uk If you are more than two years away from retirement, you might want to try the pension forecaster, a useful online tool you can access through the mybenefits website (www.mybenefits.co.uk). You will need your username and password to login (contact HS Admin if you don t have one). Financial advice By law, no company within the BASF Group, nor the Trustee, nor the Scheme administrators, nor its employees can give you specific investment advice. You should not take any information or explanation that they give you as such. If you would like financial advice, you should speak to an independent financial adviser (IFA). You should bear in mind that an IFA will charge you for any advice given. You can obtain details of a local adviser from IFA Promotion by phoning 0800 085 3250. You can also complete a request form online at www.ifap.org.uk Why not try Origen s Annuity Quotation Service at www.origenfs.co.uk click on annuity service and fill in your details to get a quote. Please note the online service does not cater for the special conditions attached to the protected rights part of your fund. You need to bear in mind annuities bought with this part of your fund are usually lower than non protected rights annuities. The Financial Services Authority also produces various guides. These are available on their website: (www.moneymadeclear.fsa.gov.uk) under publications or by calling 0845 606 1234. If you have any questions about the information in this guide, you can contact the Scheme administrator, HS Admin, or the BASF Pension Department in Cheadle Hulme. HS Admin Post: Aegon House, Daresbury Park, Warrington WA4 4HS Tel: 01928 707930 / 707932 Email: basf.team@hsadmin.com BASF Pension Department Post: BASF Pensions Trustee Limited, PO Box 4, Earl Road, Cheadle Hulme, Cheshire SK8 6QG Tel: 0161 488 5498 Email: sharon.bedford@basf.com Tel: 0161 488 5417 Email: pamela.taylor@basf.com (FEB Scheme members) Tel: 0161 488 5470 Email: alison.wilkins@basf.com Origen Post: Origen, 1st Floor, Pyramid House, Solartron Road, Farnborough, Hampshire GU14 7QL Tel: 0845 603 0836 Email: annuities@origenfs.co.uk Website: www.origenfsannuities.co.uk This annuity guide replaces factsheet 7 (Turning your account into an income) and factsheet 8 (Annuity processes). 3
About annuities An annuity is an insurance policy that provides a defined and guaranteed income in return for a lump sum of money. In simple terms, you give the insurance company the money you have built up in your account. In return it agrees to provide you with a regular income for the rest of your life i.e. a pension. In addition, an annuity can often include other benefits, such as a pension for your partner, payable on your death. Members with defined contribution benefits generally use their accounts to buy an annuity at retirement, but this is not the only option (see page 6). You also have the option of taking up to 25% of the value of your account as tax-free cash. Types of annuity There are two main types of annuity: A guaranteed annuity An investment-linked annuity You may also have come across two other types of arrangement known as income drawdown and phased retirement these are discussed on page 6. The option you choose will depend on a number of factors. The independent financial adviser (IFA) or retirement consultant will discuss your options with you, but in the meantime the points to consider section (right) will help you think about some of the most important issues. 4
Guaranteed annuity This is the most common type of annuity. In return for the money you have built up in your account, the insurance company agrees to pay you a series of regular payments at a guaranteed rate. You may also choose other benefits, such as those described on page 6 (other options). With this type of annuity, your annual pension is guaranteed not to reduce, and once the pension has been bought the terms of the contract cannot be altered in any way. The amount of pension that you can buy depends on such factors as: 1. Interest rates at the time you buy your annuity. Just as banks and building societies compete for customers and offer different rates of return, insurance companies offer different annuity rates. Annuity rates are loosely based on the income from gilts, which in turn are determined by inflation. 4 Your health and lifestyle. You will be asked to complete a health questionnaire. The insurance company will take your answers into account when providing pension details to you. 5 Additional features you want built into your pension. For example, if you choose a pension that increases every year in line with inflation, the starting level may be lower than would otherwise have been the case. Points to consider Do you want a guaranteed income or are you prepared to accept some risk in return for the possibility of a higher income? Would you like some flexibility in the early years of your retirement? What is the size of your account? Would income drawdown or phased retirement be suitable (see page 6)? Do you have other sources of guaranteed income? 2. Your age. The younger you are when you purchase your annuity, the longer your life expectancy is and the longer the insurance company will expect to pay out pension benefits. This means that your account will buy a lower pension. 3. Whether you are male or female. Women tend to live longer than men so again, the insurance company will expect to pay out pension benefits for longer and therefore charge more for a given level of pension. 5
Investment-linked annuity This is an annuity which is linked to investments. This means that your income will vary from year to year in line with investment performance and could go down as well as up. Although this option allows you to benefit from investment growth after retirement, it carries risks which do not exist with a guaranteed annuity. There are two types of investment-linked annuity: Other options Income drawdown or pension fund withdrawal Instead of buying an annuity at retirement, you can invest your account with a fund manager. Each year, you can take a small part of the money out as income. Phased retirement Instead of buying an annuity at retirement, your fund is split into a number of units. Each year, you can cash in a number of units which are used to provide tax-free cash and purchase an annuity. 1. With-profits annuity. The amount of the annuity is linked to a with-profits fund. You are guaranteed a regular payment which may be topped up by the insurance company, depending on the annual bonuses it declares. When you buy your annuity, the insurance company states its anticipated bonus and you can choose the rate of bonus for your policy (within certain limits). If the actual bonus declared is lower than anticipated, then the pension in payment will reduce. If the declared bonus is higher, the pension will increase. The insurance company usually guarantees that the pension will not fall below a certain level. The initial amount of pension provided by a with-profits annuity can be more than that from a guaranteed annuity. With-profit funds are designed to smooth out the ups and downs of investment returns and so provide an element of financial stability and security. They are not risk free and generally regarded as being low to medium risk. 2. Unit-linked annuity. The amount of the annuity is directly linked to the unit-linked funds of the insurance company. The level of your income will rise and fall in line with the value of the investments. A unit-linked annuity can offer higher returns but can also be affected by short-term investment ups and downs. It is therefore more risky than a with-profits annuity. With income drawdown and phased retirement, you must transfer your account out of the BASF Scheme and buy an annuity by the time you reach age 75. There are also other rules and regulations which apply. Further information on these options is available from the Financial Services Authority (www.fsa.gov.uk). Points to consider Considering income drawdown or phased retirement? These options are only really suitable for members who retire with large retirement funds, say 250,000 or more and/or who have another source of guaranteed income. While these options offer flexibility in the early years of retirement, they also involve risk. What happens if the company providing my annuity folds? With individual policies taken out with UK insurance companies, new policyholders are protected by the Financial Services Compensation Scheme, which is run by the Financial Services Authority. This scheme guarantees than in the event of the insurance company becoming insolvent, the policyholder will receive at least 90% of the value of the policy. If you are an active member of the Scheme, the IFA will discuss these options with you at your personal IFA session if he/she thinks that they might be appropriate. However, please note you would have to cover the cost of more detailed discussions and the arrangement of such options. 6
Your retirement choices You do not have to spend all of your account to buy your annuity you can usually take part of it as a tax-free lump sum. You would then use your remaining account to buy an annuity, part of which can be tailored to suit your personal circumstances. The most common options are: Income for others on your death (eg, spouse s or partner s pension). You can choose the amount of pension they would receive compared with your own, eg, a pension for your spouse equal to 50% of your pension. Guaranteed minimum length of payment. You could buy a pension which is guaranteed for a certain period, say five years. This means if you die within those first five years, any unpaid pension would be paid out as a lump sum. Points to consider Do you want to take part of your account as cash? Do you want your pension to be guaranteed for a minimum period? How do you want your pension to increase once it starts to be paid? On your death, do you want a pension to be paid to your dependants? Increases to your pension. You may specify increases to your pension each year at a fixed rate (for example, 3% or 5%) or linked to the rate of inflation. Restrictions you should be aware of Although you have flexibility in deciding how to use your account, there are some legal restrictions and requirements, which may apply to the benefits you can provide. As a member of the BASF Scheme, you are contracted-out of the State Second Pension. Because of this, part of your own and your employer s contributions must be recorded separately in a special section of the Scheme called your protected rights fund. There are some restrictions on the type of pension bought with this part of your fund. Protected rights built up after 5 April 1997 A Spouse s Pension: Minimum 50% of your pension, unless not legally married Pension increases: Member s choice Protected rights built up before 5 April 1997 B Spouse s Pension: Minimum 50% of your pension Pension increases: Member s choice If you transferred from the DB Section of the Scheme, you may also have a Guaranteed Minimum Pension (GMP). This part of your annuity must increase at a fixed rate of 3% per year. You can choose what pension increase and level of spouse s pension you buy with the remainder of your account. 7
Buying your annuity Where can I buy an annuity? Annuities are bought from insurance companies. Once bought, the annuity is in your name. The insurance company, not your employer or the Trustee, has sole responsibility for paying your pension. You will then have no further legal connection with the BASF UK Group Pension Scheme. How can I get the best deal? Shopping around is the best way to make sure that you buy the maximum benefits possible with your Scheme account. But you don t have to do this by yourself. The Trustees of the BASF Scheme have appointed Origen to help you with your retirement options. Origen will look for the most competitive annuity rates or suitable alternatives available, to help you maximise your retirement income. Contact details for Origen are given on page 3. If you plan to retire on your normal or target retirement date Around seven months before you are due to retire, the Scheme administrators, HS Admin, will automatically send you a retirement pack. This will contain: a fund value statement, telling you the value of your account and how much you could take as a tax-free lump sum contact details for Origen, the independent annuity arranger that will help you select and buy an annuity from the many providers in the market all the relevent forms you will need The retirement process will begin when you first make contact with Origen, either by completing the forms or by phoning them. Seven months before target retirement Five to six months before target retirement 1 2 3 4 5 HS Admin will send you a retirement pack, containing a fund value statement, contact details for Origen, and a form to get the process under way Remember you can request this information earlier if you want to Fill in the form and post it to Origen as soon as you can, or phone them if you are having any difficulties Active members should contact their HR department to arrange their IFA session An Origen adviser will contact you within a week of receiving your completed form or phone call, to discuss your options Active members will receive details of their IFA appointment At the same time, HS will provide Origen with the information they will need to process your annuity purchase Origen will obtain quotes from different annuity providers and send you an estimate It can take three to four months from the start of the retirement process to the first annuity payment being made, so don t leave it too late or you may find yourself retired with no money coming in! 8
If you plan to retire before your normal retirement date or target retirement date All members can contact the Scheme administrator, HS Admin, but active members should contact their HR department in the first instance. HS will send you the retirement pack detailed left which will start the process for Origen to provide you with an estimate. If, however, you do not want to go through the complete process at this time, you can visit Origen s online Annuities Quotation Service (www.origenfsannuities.co.uk) to obtain an online quotation. Please note this facility cannot deal with protected rights or GMP funds which typically provide a lower level of pension. Please note that during this process, the fund value provided by BASF may be subject to fluctuations until the fund is actually disinvested and transferred. It is important to note these fluctuations can result in a smaller sum being transferred and hence lower benefits being secured. You might therefore want to consider transferring your fund into the Legal & General cash fund in the period prior to the purchase of your annuity. Stage 1 and 4 below will now include a reminder and an investment change form in case you wish to do this. Five weeks before retirement Four weeks before retirement Three to four weeks before retirement Retirement date Retirement date + 4 weeks 7 8 9 10 Origen contact HS to obtain up-to-date fund values HS provide updated values, and Origen issue report and recommendations If you are happy with their recommendation, you now need to fill out and sign the enclosed forms and post them back to Origen, together with your birth and marriage certificates There is a 30-day cooling off period from this point to allow you to reconsider your decision if necessary. This means it will be a minimum of 30 days from this point until you receive your first annuity payment You return the forms to Origen Origen will contact HS Admin and the annuity provider to start the transfer of funds HS Admin will transfer the money out of your member s account in the BASF Scheme. It will take approximately two weeks from the time they receive the retirement/discharge form for the money to become available from Origen Once your funds become available, HS Admin will send you a cheque for any tax-free lump sum and transfer the remaining funds to the annuity provider The insurer will accept the funds or issue a requote (if, for example, the rates have changed since the initial agreement was drawn up) Origen will review the final quotation and either accept it or query it (which may delay the payment of your annuity) The annuity provider will arrange for your first annuity instalment to be paid into your bank account and will send you a policy document Please note: if any of your account is invested with the Prudential, the process will be delayed from step 8. This is because the Prudential will not release any money until your actual retirement date. The fund valuation and annuity rates can change up to the date the annuity is purchased. 93