Specialised Investing: Buying Annuities
Money purchase, personal and stakeholder pensions must eventually be used to buy an annuity. This is called a compulsory purchase annuity (CPA) and all the proceeds are taxable.
The tax free lump sum from the pension scheme and any other lump sum can be used to buy an annuity. In this case it is called a purchased life annuity (PLA) and only the interest element of the proceeds is taxable (about half the proceeds are capital repayment).
The provider of the annuity normally deducts tax at the standard rate of 22% so, if your marginal rate is higher or lower, you will have to pay the extra or claim a refund.
Types of annuity
There is a wide choice, including:
* Single life, the simplest type, which pays a flat rate over the remaining
life of the annuitant. You need to remember that, even with inflation of
only 3% a year, over 20 years the income will have fallen by 40% in real
terms.
* Joint life, which continues until the second death of a Couple, either
at the same rate or a lower rate after the first death.
* Impaired life, where you get a higher amount because you have a terminal
illness.
* Escalating, where the payout increases by a fixed percentage each year,
but starts lower than a flat rate annuity. With an escalation rate of 3%,
it takes some ten years for the payout to catch up and a further ten years
to recover the shortfall over the first ten.
Investment related, that is in a unit linked or with profits fund. Here the income will vary depending on performance, which may not suit you. (With profits gives a smoother performance; unit linked is more volatile.)
In the case of with profits annuities, you usually have to choose a growth rate (called the hurdle rate) of between 0 and 5%. If the bonuses are consistently below the hurdle rate your income can fall, so it pays to choose a low rate.
However, it is possible to get a with profits annuity which gives a guarantee, such as that the payout will never fall below the starting amount, naturally at a lower starting figure.
In choosing between flat rate and escalating, you need to think about how long you may live, taking into account your health and your family history of life expectation not an easy decision.
There can be a wide variation in annuity rates, so it pays to shop around. Some newspapers show the best rates currently available for standard annuities.
The most important thing to remember about an annuity is that it usually dies with you, so there is nothing left to pass on to your heirs, although it is possible to arrange for some at least of the capital sum to be preserved, again obviously at a lower starting payout.
----
If you need to borrow money, http://www.homeloansonline.org.uk provides
a quick and easy application form. Get all the options clearly explained
to you and then choose. Ideal for people looking for a bad credit unsecured
loan