I was in the pub yesterday (it’s the hot weather, you know), and I overheard an older gentleman talking to his mate, and he asked him: I’m 74 now and have a personal pension fund valued at about £20,000. My pension provider says that when I reach age 75, not far off, I will have to purchase a pension annuity. Do I have to do this?
I didn’t butt in with an answer but here it is: pension rules state that you must commence drawing an income from your pension funds by your 75th birthday. As well as using it to buy a lifetime annuity, which provides a guaranteed income in retirement, your money could remain invested through an Alternatively Secured Pension (ASP) from which you must draw an income. However, for someone with a solitary pension fund of around £20,000, an ASP is too expensive to run and will also too much investment risk. The good news is that most personal pension plans offer an open market option. This lets you shop around to find the best annuity rates for your circumstances.
For example, an impaired life annuity or an enhanced annuity might pay you a higher income based on your stste of health, where you live or if you are a regular smoker. you should use the open market option to maximise the income you get from your pension fund. Even if you don’t suffer from ill health you could still get 15%-25% more retirement income due to the large difference between the worst and the best annuity rates.
