There are a variety of options available to you with your pension annuity, the income in retirement you buy with your pension fund:
A single-level annuity is the simplest type of pension annuity. It pays out exactly the same amount to an individual (the “annuitant”) every month until the annuitant dies.

A guaranteed annuity pays out an annuity payment each month for at least the length of the guarantee period, even if the annuitant dies before the end of the guarantee period; in which case the guaranteed annuity payments are made into the annuitant’s estate. The maximum guarantee is ten years. Five years is quite common in practice.

With an inflation-linked annuity the annual payments increase by the rate of increase in the Retail Prices Index (RPI) to give payments protection against inflation.

With an escalating annuity the annual payments increase by say 3 or 5 per cent to give the pensioner some protection against inflation and to allow for possible increased income needs as the annuitant ages.

Joint-life or last-survivor annuities pay an agreed annuity payment to an annuitant and the annuitant’s partner while both are alive. Following the death of the annuitant the contract pays either the same amount or an agreed reduced amount each month until the partner dies. The reduction in last-survivor annuities is typically a half to one third.

Investment-linked annuities involve the fund backing the pension annuity being invested in an equity product. The annuitant receives an annuity payment that is related to the performance of the equity market.

An impaired-life annuity pays an increased annuity payment if the annuitant has health problems, such as cancer, chronic asthma, diabetes, heart attack, high blood pressure, kidney failure, multiple sclerosis or stroke.

An enhanced annuity pays a higher annuity payment related to actuarial considerations.

Phased-retirement or staggered-vesting annuities. With these, instead of converting the whole pension fund, withdrawals are scheduled over several years. This is achieved by splitting the fund into many separate segments.

A with-profits annuity links income directly to the performance of the insurance company’s with profits fund. Typically, income is made up of two parts: a minimum starting income and bonuses.

A short-term annuity allows an individual before 75 to use part of a pension fund to buy a fixed-term annuity lasting up to five years. They can choose annuity options in much the same way as basic annuities.

Value-protected annuities pay a lump sum on the death of the annuitant, equivalent to the difference between the original purchase price and total payments made. The lump sum is taxed at 35 per cent. They are only available until aged 75.

With so many choices it is wise to seek out specialist advice when buying your pension annuity.

People approaching retirement, with their pension pot ready to purchase a pension annuity, their retirement income, should be in no doubt that they have a choice of providers when it comes to purchasing an annuity. The message must be far stronger if consumers are to benefit from the highest possible level of retirement income under the Open Market Option.

The Open Market Option gives investors the opportunity to purchase their pension annuity from any annuity provider, regardless of where they have previously invested their pension. All the investor has to do is to find out which provider offers the best annuity rates and options for their circumstances and move their pension pot to that provider.

However, literature from life companies is not clear enough regarding the Open Market Option.  Consumers should be in no doubt that they have a choice of annuity providers and by how much it could increase their retirement income….perhaps up to one-third depending on state of health. 

Pension annuities are complex and consumers need to take advice if they are to receive the best deal.  Factors such as health, or even where the client lives, must be considered as impaired life or postcode annuities can significantly increase income. There are other things to consider, such as death guarantees, inflation increases and widows pensions which will all affect the level of income paid. Only by taking independent financial advice will a person on the point of retirement be sure they are making the right decision and receiving the best available income. This is the service available via this website.

Some thematic work on Open Market Options, recently carried out by the Financial Services Authority, is a step in the right direction, but more needs to be done.

One very strong option would be to force life companies to include open market rates on the quote allowing clients to compare different annuity rates and pension income. At the very least the Open Market Option should be up front and in bold. Some documentation is so unclear it probably wouldn’t be regarded as meeting the Financial Service Authority’s Treating Customers Fairly (TCF) initiative.

There are some new figures from the Government revealing just how much Britons need to save to avoid retiring on means-tested state benefits…and it makes for a daunting read. The Department for Work and Pensions (DWP) admits that low earners will see their retirement income increase by only 1 per cent of their salary, or £2 a week, after 10 years’ saving in the Government’s flagship new pension scheme to be launched in 2012. This as a result of means testing pension income. Not a particularly good return!

These figures highlight the way Pension Credit, the means-tested benefit paid to pensioners with small pensions, reduces the incentive for many people to save. Indeed, some research suggests that the average UK saver needs to build up a pension pot of £43,789 to avoid retiring on benefits at age 65. This pension pot then being used to buy a pension annuity for the individual’s retirement income. Interestingly, the average pension pot in the UK today is below this figure, nearer £35,000.

Some say this is a hangover of offering Pension Credit to today’s pensioners, which has helped millions of elderly people, but has also had an effect on the incentive for many to save.

Many people will fall on benefits as they get older because while basic state pension rises each year in line with prices, and most pension annuities have no inflation protection at all, the threshold for benefits goes up in line with wage inflation, which increases at a higher rate.

Non-means tested state pension comes in two parts. Basic state pension, currently £90.70, and state second pension, which varies in amount depending on earnings over your working life. The average combined basic and state second pension is currently £134 a week.

To understand how the means-testing system will affect your pension saving, you need to know how much state pension you are likely to get. You can do this by contacting the Pensions Service by telephone or by visiting their website in the first instance.

Another poll, this time suggesting that millions of Britons are unsure over the terms of pension policies and could be jeopardising their pension annuity retirement income as a result. A poll conducted by Halifax for its Pension Health Check report found that 61% of respondents did not know the difference between a personal pension and a state pension.

Meanwhile, 56 % admitted they do not know the meaning of a pension annuity and 79 % were unsure when or how their personal pension would be paid out to them. Customers are being urged to take a more active role in saving for their retirement and to seek out advice to help them understand pension plans.

In a statement: “Our research highlights confusion over pensions amongst the British public. We are issuing a timely reminder for people to start thinking about their retirement plans. Costs are rising and people are living longer which means it is more important than ever before that people have the funds in place to support their lifestyle in retirement. It’s important that people seek financial advice when arranging their pension.”

I suppose one could say: if you don’t know, ask.
 

Put this another way; is your pension annuity income going to be adequate? Might you have debts to consider? It is likely that most people when retiring won’t have enough income from their pension annuity and from their state pension. This could be made even worse if they have debts to repay on a monthly basis; eating further into their income.

One answer could be to consider equity release. This is the name given to releasing some money from the value of your house, often with no interest repayments until death. Utilising this form of contract is becoming increasingly popular at retirement to help improve life in retirement.

It is not for everyone, and ther are many issues to consider, but equity release and a good pension annuity rate could be a sensible combination.