It seems that wherever one looks in the media at the moment a commentator, government minister or journalist is stepping forward to tell us how awful annuities are and posing the question: why are annuities so bad?
This, therefore is an important statement that should be absorbed before we continue; not all annuities are bad, some offer good value for money and many policy holders are happy with their choice of product.
Some savers with policies have been busy asking themselves ‘how much is my annuity worth’, and at least a few will have been pleasantly surprised by the answer. Others will be demanding to know ‘how do I sell my annuity?’
Ok. That’s that out of the way and the reason in this blog that there is a brief spell of objectivity is simple. If we are discussing the alternatives to annuities we should not start from the standpoint that they are all bad.
What do I need a policy to do?
For those of you who are asking: What is an annuity? It is a policy that used to be compulsory for most pensioners, sold by insurance companies, which guaranteed a fixed, monthly income for life in return for ones pension pot.
The role of any policy or plan that acts as an alternative to an annuity is simple, it has to last as long as you do.
An annuity will expire on the policy holder’s death, a factor that makes it attractive as it is a guaranteed income for life and will not run out before we head off to meet the great financial advisor in the sky.
Having the option of income drawdown presents savers with new options for finding more flexible retirement finance arrangements and one of the chief concerns for many is to limit the amount of tax liabilities on their lump sum.
On retirement, it was previously compulsory to buy a policy from an insurer unless one was lucky enough to have a final salary pension.
Now, as the restrictions have been removed savers have a number of choices when it comes to accessing their lump sum, a process which is referred to as ‘pension drawdown’.
Before April this year there were two main types of drawdown, capped and flexible. Capped drawdown meant that you could withdraw up to 150 percent of the amount per annum that you would have received each year if you had decided to purchase an annuity.
A flexible draw down enabled you to withdraw per year as much as you liked. There were more risks with the latter policy, but the risk was limited as your income from other sources needed to exceed £12,000 a year in order to be eligible for it.
Now the drawdown schemes have been simplified and replaced with flexi-access drawdown, which allows pensioners to take a quarter of their pot tax free in a lump sum withdrawal.
Subsequent withdrawals after the 25 percent tax free chunk are taxed at the standard income tax rates. If in a tax year you withdraw just £10,600 it will be tax free and the next £31,785 will be taxed at twenty percent.
If you’ve already been part of a capped or flexible drawdown plan, as of April 2016 these plans will convert to the new flexi-access scheme.
If, before now you’ve been wondering ‘what is an annuity’ or ‘how do I sell my annuity?’ it might be worth getting some professional advice on annuity policies, drawdown schemes or other alternatives.
It’s hard to argue about the importance of saving for old age. Those still of working age need to look at how they are going to finance their later years. Those already retired need to think about getting the most out of their available finances. The exact rules around pensions and savings can be changed in line with government policy at any given time. Indeed the pension system has just been through an overhaul and with an election looming, politicians of all colours are setting out their plans for the future of pensions and the pensions of the future. In reality, however, these plans only have any meaning to people who are focused on saving for retirement. Let’s therefore look at some key questions on the topic.
What Is A Pension Pot?
Quite simply a pension pot is a common term used to describe savings which are specifically to finance retirement. People contributing to a pension pot may get assistance from the government (in the form of tax relief) or from an employer (in the form of contributions). Pension contributions are usually locked away until you reach retirement age.
How Do I Calculate My Pension?
There are plenty of online calculators to help with this. It’s strongly recommended to keep track of how your pension is doing so that you know where you stand. If you do decide you need to take action, sooner is usually better than later. https://www.moneyadviceservice.org.uk/en/tools/pension-calculator
I Don’t Like What I’m Seeing, How Can I Build A Healthier Pension Pot?
You have three options. You can save more money, you can manage your savings more effectively or you can do both. It can help to look at this question in the light of your overall financial situation. For example if you are carrying high-interest debt, such as credit-card debt, then it may well be in your best interests to focus any spare cash you have on paying this down.
Once you have cleared your debt, you can then divert the funds to building your pension. If you do have spare cash and are in employment, then it may be useful to look at making extra contributions to your workplace pension. This can be particularly helpful if your employer will top up any contributions you make. If you’re unsure about locking cash away until you retire, then it may be worth looking at ISAs as an alternative. Although contributions to ISAs are made out of post-tax income, generally speaking the income they generate is tax-free and the money in them remains accessible if you need it.
What Do I Need To Know About Getting More From My Pension Pot?
For many years getting more from your pension pot generally meant getting the best deal on an annuity. Now there are vastly more options for those with pension pots. With this in mind, it can be very helpful to get some professional advice before taking any significant decisions on how best to use your pension pot. http://www.telegraph.co.uk/finance/personalfinance/pensions/11468752/New-pension-rules-to-let-retired-savers-cash-in-annuities.html
It is also advisable to keep up to date with any changes which may affect pensions. For example at the current time, the Conservatives have a proposal to allow holders of annuities to sell them on. If enacted this could have massive implications for existing pensioners.
It’s also worth remembering that, generally speaking, pensioners have access to the same savings and investment products as those of working age. For example they get exactly the same ISA allowance as working adults. There are even some savings products tailored specifically to their needs (e.g. pensioner bonds). These can all help pensioners to make the most of their finances. http://www.moneysavingexpert.com/savings/pensioner-bonds