Selecting an Annuity

thewaterboy

Hi, I am a 60 year old recently retired school teacher. I therefore have my teaching pension, but have also saved £45,000 in a pension plan. I am going to withdraw 25% of this tax free and with the remainder I am going to buy an annuity.

The difficulty I am having is which option to select. Do I go for :

a) Flat rate
b) Index Linked
c) With profits

I am not in immediate need of a higher rate, so dont know which to go for, as my potential to spend will obviously go down.

Also should I put my wifes name on the annuity or just my own?

Finally, how much risk is there to be aware of that a annuity provider could be liquidated, aka northern bank?


Many Thanks

DavidLaGuardia

Not everyone has the same priorities, so it is diffcult to given you an answer that will fit you. Nevertheless, here is some food for thought.

You are quite young so income withdrawal might be an alterntative to an annuity, or even an option that offers temporary annuity for five years with the reamainder invested to take later (sometimes this is also a guaranteed sum so there is no investment risk but only a few companies offer variants of this)

If you want an annuity an investment linked annuity (with profits or unit linked) gives scope for growth in the future with a bit of a downside risk. Over time it could be better since conventional annuities are linked to gilts which have low returns albeit they are safe.

As to putting your wifes name, it will reduce it, but if she is dependant on you its a jolly good idea. If she's a 26 year old dolly bird you might struggle though! Only alternative is a (vert cheap at 60) guaranteed minimum payment term of 5 or 10 years guaranteed irrespective of your survival.

Indexation protects your annuity against inflation, but the annuity starts off much lowe taking many years to catch up (unless of course we go into more rapid inflation and you link it to RPI rather than a fixed percentage). Although I have no empirical evidence of a consensus view, "Many people" seem to to take the view that a higher level pension is also desirable as they get the money in the early years when they are more likely to be healthy enough to enjoy it.

dunstonh

Another option is to leave it invested if you dont need the money. The death benefits on a pension are always best before you crystallise benefits (the term for taking the 25% TFC and annuity or drawdown). Plus, the older your are, the better then annuity rate when you do start and the fund value will go up over time.

Another consideration is if there are guaranteed annuity rates. These may only apply in certain circumstances (i.e. single life only or at certain ages).

Finally, how much risk is there to be aware of that a annuity provider could be liquidated, aka northern bank?

Northern Rock has not been liquidated and is solvent. Annuities tend to be funded using gilts so you would need the Govt to go under.

Obviously, when you get your IFA to do the open market option review get them to price up a few options, such as level, increasing, capital buy back etc

EdInvestor

DavidLaGuardia wrote: »

You are quite young so income withdrawal might be an alterntative to an annuity, or even an option that offers temporary annuity for five years with the reamainder invested to take later (sometimes this is also a guaranteed sum so there is no investment risk but only a few companies offer variants of this)

Assuming the pension does not have a valuable guarantee, a further option may be to put the fund into income drawdown and take out the 25% tax free cash, but leave the remainder of the fund to grow without taking an income at this stage.

This can provide additional security for the spouse, as she can take that fund in cash on your death (minus 35% tax), whereas with an annuity she usually will get nothing or a 50% taxable pension income which will have dwindled to not a lot over the years....