Pension Advice

modelreject

Another small question. What happens once I come of age to take my pension. In my head I think that you get 25% lump sum and then buy an annuity to provide me with salary until I die?

If this is correct I am unsure of how this works. Say I my pension pot is £200,000 and I get £50,000 when I retire. How does the £150,000 pay me for, lets say, the next 30 years of my life (if I'm lucky)? Also, what happens to the £150,000? Is it invested again?

Many thanks for all the help.

C

hugheskevi

What happens once I come of age to take my pension. In my head I think that you get 25% lump sum and then buy an annuity to provide me with salary until I die?

There are some other options, but yes, that is the most likely thing to happen.

Say my pension pot is £200,000 and I get £50,000 when I retire. How does the £150,000 pay me for, lets say, the next 30 years of my life (if I'm lucky)? Also, what happens to the £150,000? Is it invested again?

The £150,000 is paid to an insurer, who provides the annuity. You can choose various options, eg, have the annuity increase by inflation, have a guarantee period in case you die young, have spouse benefits, and so forth. Basically, the more of these features you have, the lower the starting amount of payments.

The annuity provider's obligation is to pay you for as long as you live, with payments increasing depending on what type of annuity you purchased. They might make money out of you personally, or they may lose money if you live a long time. On average, they will make a small profit across all their customers through longevity pooling (if they have their sums right).

The £150,000 that you give to the insurer is invested by the insurer, usually in safer assets such as corporate bonds or gilts - but that is irrelevant to you once you have paid over the money - the insurer bears the risk of investment, and you have a fixed flow of income for the rest of your life.

There are other options, as mentioned above (commonly referred to as income drawdown), whereby you could choose not to buy an annuity and instead keep the fund invested as you choose, then you bear investment risk rather than the insurer. There are pros and cons of this, but normally this is only normally suitable for larger sized pension pots.