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A Planned Retirement will be fun

We all have to retire sometime, whether you manage to get out early or are one of the majority who has to soldier on ‘til 65. As the day nears, unless you are lucky enough to be one of the few on a final salary scheme, your Company or Private Pension Provider will contact you to tell you what you’re going to get and this is where the complications start.

By law they have to offer you the opportunity to transfer the fund you have built up into an annuity with another company (known as the Open Market Option)  and you must now convert your pension pot into an income that will last you for the rest of your life, which is done by buying an annuity.But what exactly is an annuity?

An annuity is a financial product where you exchange a lump sum for income. How much you get will depend on a number of factors: These include:

Your savings

How much you have managed to save in your pension pot over your working years

Where you live

Annuity providers sometimes base annuity rates on mortality rates in different parts of the UK. If the area you live in has low mortality rates, you may get a higher rate as the insurer assesses that you’re likely to die sooner and therefore they need to make payments to you for a shorter period.

Your health

Similar to postcode pricing, if you’re in poor health, annuity providers will assess that you have a lower life expectancy and thus, a shorter period for them to pay out for. This could increase the rate that you receive, or qualify you for an enhanced annuity. But you don’t have to be at death’s door, you can get an enhancement even if you’re a light smoker, overweight or have diabetes, so it always pays to check.  Enhanced annuities can pay up to 40% more than standard rates to those with reduced life expectancy.

The annuity rates offered by individual annuity providers

There are lots of different annuity providers and much competition in the annuity market, so rates can vary between providers. When you’re looking to buy an annuity, it’s essential that you shop around for the best rates, using the Open Market Option.

Unfortunately, recently published figures from the Office for National Statistics (ONS), show that in the last three years the cost of buying an annuity has risen by nearly 30%, compared to what you would have achieved in 2009.

To guarantee a pension income of £10,000 a year that rises with inflation, a 65-year old man now needs a pension pot of £305,000 compared to £118,000 three years ago. Annuity rates have been falling for well over a decade, with the average return from a pension pot at 65 falling from 15% in 1990, to today when it is just over 5%. Long-term factors, such as increasing life expectancy are behind the trend but more recently low interest rates and falling gilt yields, exacerbated in part by quantitative easing, have rapidly increased the downward slide.

Comparing annuity offers 

The annuity market is served by a number of large providers, who compete for pension savers. IFA’s stress the potential benefit of searching the market, rather than automatically accepting the rate you are offered by your pension provider and shopping around is particularly important, especially for anyone in ill-health.

Comparing annuity quotes can boost your pension income considerably. It is also crucial to make sure you buy the right sort of annuity. The ONS example gives figures for an index-linked escalating annuity that protects against inflation. A flat-rate annuity would pay far more for the same lump sum, but this will be reduced if you need a joint-life annuity to provide for your partner; however this is less expensive than it sounds and is well worth considering for most couples. Taking independent advice from a good IFA will help with these decisions as well as giving a wide range of rates.

If you need any good generic advice on your pension options or need a recommendation for a good IFA, Morgan Jones & Co have been looking after their clients best interests for over 25 years, so give us a call.

David Jones is the Senior Partner and Founder of Morgan Jones & Company. Born in Liverpool and a graduate of Liverpool Collegiate Grammar School, David spent twenty years working for the Customs & Excise in London then Shrewsbury before starting his own business. David’s depth of knowledge of the UK tax system and his ability to communicate this learning has seen Morgan Jones & Company grow into on Shropshire’s most respected Accountancy Practice. Email David 
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