An Annuity, what’s that?
Research from Standard Life's ‘Changing Face of Retirement' report highlights the lack of understanding of the annuity market in the UK, despite its importance as an income source in retirement.
John Lawson, head of pensions policy at Standard Life, said: "As life expectancy increases and the prospect of living longer in retirement becomes a reality for many, having a solid understanding of your financial options during these years is important.
"Being better informed on how your pension can fund your retirement will put the customer in a stronger financial position in the long run. And taking an annuity is one of the most common ways to turn your savings into an income when you retire. Annuities offer you security and a reliable income throughout retirement years. As people live longer, with some possibly living in retirement for 25 to 30 years, having that guaranteed income stream has obvious advantages. Therefore knowing what an annuity is, how it works and if it's the right option for you is vitally important.
"There are a wide range of options available when you buy an annuity. There is no one size fits all, and if somebody decides to go down the annuity route, they need to get the right advice to help them secure the best outcome. If they don't even know what an annuity is, how are they going to be in a position to decide whether they should take one that's RPI linked** or level***, for example?
"People shouldn't just jump in there but should research and discuss all the options and outcomes. When it comes to other purchases, such as cars or domestic appliances, most people don't just go out and buy the first one they come across; they research it first to understand whether it represents value for money and meets their needs. People should be taking a similar approach with their retirement income. Seeking financial advice makes your choices clearer so that you can buy the annuity that is most appropriate for you."
As part of the Changing Face of Retirement research, Standard life has published a list of top tips to help people understand their options at retirement:
1. Seek professional financial advice
2. Give yourself plenty of time to consider your options
3. Research the annuity features and decide on what's important to you
4. Work out your retirement objectives and how you want to fund them. For more tips, visit yourfuturemoney.co.uk.
5. Ask for a state pension forecast (and calculate your state pension retirement age). Go to:
direct.gov.uk/en/Pensionsandretirementplanning/StatePension/StatePensionforecast
6.Don't forget about the effect of inflation. Inflation of 5% a year will reduce the purchasing power of a fixed level annuity by 35% within 10 years of retirement
7.If you are in poor health or smoke, you may qualify for a higher amount of income
8.Those with bigger pension pots can also consider drawing retirement income direct from their pension savings. This is called ‘income drawdown' and can be a tax efficient choice, allowing you to vary income from year to year to suit your income needs and tax position
9.Think about death benefits, whether you want the residue of your savings to pass to your spouse or estate, or whether you want to provide an income for your family on death
10.Think about how you can use other savings to top up the income from your pension