This article is about pension annuities and alternatives to getting the best pension annuity rates in 2010; some alternative retirement options. Although a basic annuity will be suitable for most people, there are alternatives available for those with larger pension funds and a willingness to take higher risks. The main two options are an investment linked annuity and income drawdown (now unsecured pension). With normal annuities, your purchase money will be invested in gilts. These pay out a fixed level of interest and, because the UK government issues them, they are regarded as a particularly low risk investment.

Investment-linked annuities covers both with profits annuities and unit linked annuities, and, if security is important to you and you’re depending on your annuity as your sole source of income, you may find these products too big a risk to take. Compared to a conventional pension annuity, in theory you could potentially get better returns with an unsecured pension. But they’re called unsecured for a reason, and your investment could be susceptible to drops in the stockmarket. This option is really for sophisticated investors who are comfortable taking risks and who could possibly afford to lose some money. With an unsecured pension arrangement, your income is not set for life. It remains partly invested and exposed to the stockmarket.

There are three different types of unsecured pension. There are short-term annuities, income withdrawal, and phased retirement, and there are three key reasons people choose these over conventional annuities. There are those who only need a small amount of the income that would be accessible from a pension annuity and they may wish to leave most of the fund invested while drawing their limited income. And, when annuity rates are low you might decide to delay buying one in the hope that rates will increase. There are no guarantees that this will happen, though. Or, if you want to leave the fund to your partner should you die, an unsecured pension means your money is more accessible.

Maybe now is the time to be preparing your personal finances for a stockmarket recovery. Maybe you should look to get your pension fund investments back on track ready to buy your annuity with. It is possible that an economic recovery may have unwelcome financial consequences for some if they have not pre-empted the likely changes.

Keeping your personal finances in order throughout the current turbulent economic times we are witnessing has been all about battening down the hatches and limiting your exposure. However, in recent weeks we have seen a lot more positive news coming from economists and industry. Even the Confederation of British Industry (CBI), the employers’ organisation, sharply upgraded its own growth forecast recently, and maybe there are signs of economic green shoots, but not everyone agrees with the CBI on the time frame. Certainly not when you consider that public borrowing hit a record £19.9 bn in May. 

Those approaching their retirement may wonder if their battered pension fund might benefit from more time to recover from their falls, and may be debating whether to wait to buy a pension annuity to provide lifetime income, or considering a more flexible product like income drawdown that allows some money to stay invested. Interestingly, though, it is not usually wise to delay buying a pension annuity.

There are some quite opposing views about the current economic situation, and retirees should be very careful not to end up in a worse position than they are in currently, particularly if the so-called economic recovery turns out to be “W” shaped, with yet another dip in equity values. Those coming up to their retirement should be very wary of gambling their pensions on a short-term market recovery, and a one-year time frame is certainly not an appropriate one for stockmarket risk. Then we have annuity rates to consider, and at the moment they aren’t heading in the right direction, but might they in the future?

Instead of buying an annuity by the age of 75 there is an option, and it goes by the name of an alternatively-secured pension (ASP). Retirees can move into an ASP from income drawdown (now called unsecured pension) when they reach age 75 as a way of remaining invested in the stockmarket and taking an income from their pension fund.

An ASP might suit those who still want to keep their pension funds in the stockmarket, but the main benefit is likely to be for those retirees who want to pass their pension money to their heirs on death, by avoiding buying a pension annuity. Now, while ASP’s can be used to pass pension fund money to heirs, the tax charges are very punitive at up to 82%, and there is also an obvious risk in remaining  invested in the stockmarket at this age.

A scheme pension is typically used in occupational pension schemes such as final-salary arrangements. But some insurers have recently set up such plans, aimed at families or the small business, that also allow scheme pensions where an actuary for the pension arrangement calculates the amount of income to be paid out to the retiree each year. These scheme pensions can pay out a higher income than a pension annuity or ASP, even considering good annuity rates, which is calculated using government actuary (GAD) figures. Scheme pensions can also be used to pass pension monies to heirs, by buying a 10-year guarantee on the income taken, which can be paid out to beneficiaries after the scheme member dies. However, these can be very expensive to set up, with initial charges of typically more than £1,000, with hundreds of pounds being paid in annual fees, making it quite a niche product.

So, if you are heading towards age 75, looking at annuity quotes for the best annuity rates, which should be good at that age, but you are unsure of the position regarding your death and passing money to your heirs, maybe an ASP is worthy of consideration.

Living Time has announced changes to the flexibility of their Income Plan, their alternative to an annuity. They have just reduced the minimum term on their Income Plan to three years, offering retirees extra flexibility to arrange a secure retirement income while keeping their options open. This Income Plan pays a secure rate of income to the retiree during the term and then returns a guaranteed maturity sum that the client can use to purchase a new retirement income solution that best fits their changing needs.

Without investment performance risk, that income can be tailored at the outset to meet retirees demands, subject to the maximum 120% of the government’s actuaries department (GAD) limit. Living Time state that the Income Plan is a very straightforward package offering greater  flexibility than a lifetime pension annuity but more security than normal income drawdown, and they believe that the plan will appeal to independent financial advisers (IFA’s) who want to advise clients not only at the point of their retirement, but on effective use of their pension fund throughout the early years of retirement.

The economic turmoil we are witnessing has made IFAs and their clients very wary of locking for life into what this year has to offer, driving demand for real alternatives to lifetime annuities, and the  Income Plan offers such. It must be taken out for any term of at least three years, and will provide a secure income during that period, and to a maximum age of 75, and it allows retirees keen to wait for the economic dust to settle, so to speak, to have a better view of their ongoing health and wealth situation.

The Living Time Income Plan can accept pension monies that includes protected rights funds and is also available as a Trustee Investment Plan (TIP) paying a guaranteed return within a self invested personal pension (SIPP), and it could be worth considering as you search through annuity quotes looking for the best annuity rates.

Where next for that variable annuity, with all the changes that have gone on recently? These variable annuities, or third way annuities, have been available in the UK for just over two years and the signs are that they are growing in their popularity. Watson Wyatt, leading consultants, have been tracking the market and their figures illustrate that in 2008 sales passed the £1billion mark. Early indications for this year suggest that this trend will continue, despite the market volatility and the dark recession we are witnessing.

There are good reasons for this growth. First, the product providers have gone to great lengths recently to build awareness and profile for their various products – with advertising, seminars, press coverage, and the like all used to great effect.  There can’t be an independent financial adviser (IFA) in the country active in the at retirement market who hasn’t been reached by this information about variable annuities.

Secondly, there is a real lack of alternatives available for those people who want or have to retire.  Conventional pension annuities are not only inflexible and irreversible but they can be ineffective at keeping pace with inflation; and then there’s the annuity rates themselves, which have been falling for some time now and there’s nothing to indicate that this is going to stop or be reversed.

Then of course we have the investment market: many people will have seen the value of their pension fund fall over the past few years and the current value, coupled with low pension annuity rates, means that many can’t really afford to retire.  Of course, there’s income drawdown to be considered as well, but these people will have the memory of stockmarket falls pretty fresh in their minds and may well be very wary of leaving their retirement income to the vagaries of the world’s stockmarkets.

All these things have all conspired to help the growth of the variable annuity market in the UK.  These contracts do allow the client to remain invested and therefore benefit from any recovery in the stockmarkets but in case they fall again, the variable annuity offers a guarantee option that allows the client to sleep soundly.  Yes, the guarantees do have an additional cost, but, for a client who may have experienced a fall of 30% or more in his pension fund value in the last year, that does increasingly looks like a cost worth paying.

Most variable annuity contracts are essentially income drawdown products.  The difference between the two is the availability of either a capital or an income guarantee.  As an adviser, facing that client looking for help with their retirement planning and get a fair level of retirement income both now and in the future, income drawdown has benefits over a conventional pension annuity - the main one being the chance to leave a fund invested and benefit from market recovery as and when it happens.  If the adviser can offer that client all the benefits of income drawdown with the added security of an insurance that his income won’t fall below a certain level, that has to be the real icing on the cake.

In this market, Lincoln i2Live is also available as a flexible annuity contract which means that a client can travel seamlessly through the age 75 barrier and continue with the same investment strategy, benefits and that income guarantee. So, when you’re on the look out for your annuity quotes, you might want to check this out.