What's on the Menu When it Comes to Your Pension Annuity?
Although the idea of facing a number of different options when it comes to your pension annuity may seem alien to some, it is an important issue as what you decide to do with your fund can influence how you spend your later years. Get it wrong, and you may end up with less of an income than you wanted. Get it right, and you may get the rest you deserve in complete peace of mind.
For those not in the know, you can currently turn the pension fund which you have been saving into an annuity option at the age of 50 at the earliest. Many people will decide to do something a lot later than this, but nonetheless you need to make a decision in time. There are many things you can do when the time comes to make your choice, and there are more options available than many people realise.
The entire pot of money you have put into a pension fund while working is not untouchable. You may decide to take what is known as tax-free cash. Quite simply this is a slice of the fund tax-free which you can then spend as you wish, but some of it will need to be left behind and turned into an annuity. This is where your options expand further.
In most cases whoever has been administering your fund will offer you a pension annuity deal, essentially turning your fund into a method of income for the rest of your life. But this is not the only option and you are free to shop around a number of different providers who may offer different packages at different values. Your right to take this route is known as the open market option or OMO, and fund providers are obliged to advise you of it and ensure you understand that other companies and annuity deals are available.
The open market option is something which was created by law and means you can shop around a number of providers. Some may offer you a lower income than others for a shorter period meaning there is competition for your cash. And some deals will be better than others. For example, one company might be able to offer you £9,000 a year for the rest of your life if you had a £100,000 fund. But another provider might be able to provide you with a £10,000 a year income for the rest of your life from the same fund.
Impartial financial advice is always a good idea when selecting a pension annuity as many different products are linked to investments and other variables. These are sometimes favoured by people who have other resources such as savings to fall back on if their investment doesn't work out. There are also impaired or enhanced annuities which supply potentially superior incomes to people who have a reduced life expectancy due to health reasons. Whatever your situation, the annuity market may be broader than you first thought, all you have to do is choose the right way for you.
Steve Wright is Managing Director of YourPensionAnnuity.com an independent financial adviser specialising in retirement income advice and pension annuities