Guide to buying an annuity

Transcription

1 Guide to buying an annuity

2 2 Welcome to our guide to buying an annuity You now have more choice than ever before when it comes to using your pension savings. Of course having more options can make it difficult to know what s best for you. An annuity is the only financial product that offers you a guaranteed income for life and you can structure it to suit your needs. You may want to protect your income against inflation or perhaps provide for your loved ones. On page 9 of this guide you can explore the different ways to personalise your annuity income. What s more, you don t have to buy your annuity from the company looking after your pension savings. By shopping around and providing details of your health and lifestyle, you could get more retirement income. Whether you re simply researching options or you re looking for a better guaranteed income, this guide s designed to help. And, if you d like more support or just have a question or two, you can always give us a call on the number below. To compare annuities and get the best rate, try our online annuity planner at hubfsp.co.uk. It could help you achieve a higher level of income for your retirement. Did you know? The Financial Conduct Authority (FCA), the industry regulator, have put in place information prompts to help consumers understand whether they are getting the best annuity rate on the market. This means all annuity companies have to provide a reminder alongside every quote, which will help people be better informed and encourage them to shop around.

3 3 Contents 1. Things to consider as retirement approaches 4 Money and budgeting Find out how much State Pension you re entitled to Consider the value of your current pension pot How long could you live? 2. Get a clear picture of your pension pot 5-6 Tracking down old pension schemes Personal pensions Workplace pension schemes Guaranteed annuity rates State Pension Other savings 4. Structure your annuity to suit your needs choosing your annuity options 9-14 Take a tax-free cash lump sum Arrange when to receive your retirement income Protect your income against inflation Provide for your loved ones 5. How to use our online annuity planner What happens when you apply for an annuity? Other ways you can get a retirement income Find out more about types of annuity 7-8 Lifetime annuities Investment-linked annuities Purchased life annuities

4 4 1. Things to consider as retirement approaches Entering retirement can be quite an upheaval. Making a few preparations now could help make sure everything s in place when you come to that next phase of life. Here are a few things you ll want to think about. Q Will you be ready to retire completely or would you rather keep working in some capacity? Q How much income will you need in retirement? Q How can you add to your pension pot in the final year before you retire? Q What will your final pension funds be worth and how much State Pension will you receive? Money and budgeting Knowing what your future income and costs will be helps you see how your retirement will look from a financial perspective. Can you afford to retire now, or do you need to wait a while? To plan things properly, you ll need to know what pension savings you already have. You can find out more about pension savings on page 5. Based on the information you give about yourself, our online annuity planner will offer you a range of personalised annuity quotes. This lets you know what retirement income you could receive for life, so you can plan your retirement with confidence. Find out how much State Pension you re entitled to You need to know how much your State Pension will be and find out any other benefits you could claim. Remember, your State Pension payments may not start the day that you retire. You ll want to include the right start date in your budget. You can read more about the State Pension on page 6. Consider the value of your current pension pot Your pension provider should send you a statement each year telling you the value of your pension pot. You can ask them at anytime to tell you about the annuities they offer and explain your options. You may want to take some tax-free cash from your pension pot for example. It s possible to have more than one pension pot so you ll want to make sure you ve considered them all. If you re not sure where your pension pots are, you can contact the Pensions Tracing Service. See page 5 for details. How long could you live? It s important to consider how long your retirement savings may need to last, especially as we re generally living longer these days. Even if you decide to retire in your 60s, you could be retired for another 30 years, so it s worth bearing this in mind when you are thinking about giving up work completely.

5 5 2. Get a clear picture of your pension pot You may have saved into a number of pension schemes over your working life. Perhaps you did it through your employer or your own business or maybe you ve set up a personal pension. When considering retirement, you need to know the details and pot sizes of all of your pension schemes. Here are some questions you ll need to answer. Q Which providers are your pensions with? Q When does each provider expect you to retire? Q What type of pension do you have? Q What is the current total value of all your defined-contribution pension plans? Q What is the estimated value of all your defined-contribution pension plans at retirement? Q Does your pension have a guaranteed annuity rate (GAR)? Knowing where all your pension savings are is critical to get the most from your combined pot. Once you have this information you ll be able to use our online annuity planner to give you an accurate quotation. Tracking down old pension schemes If you re not sure where your pension pots are or how much is in them here are a few tips on finding out. Most pension providers issue letters and statements, at least once a year. These should tell you all you need to know. If you haven t received a statement, it s worth checking with your provider that they still have your correct address details. If you don t know who your provider is you can call the Pensions Tracing Service. Personal pensions With a personal pension you build up a pension fund by investing your contributions. You could then use some or all of the money in this fund at retirement. Workplace pension schemes There are basically two types of workplace pension schemes. Some employers offer a mixture of each. 1. Defined-benefit schemes also known as final-salary or average-salary schemes This type of pension pays you a set income which is guaranteed for life. It s based on things like your length of service, your earnings during your membership of the scheme, and the percentage of your earnings that the scheme pays for each year s service. Contact the Pensions Tracing Service by calling them on or go to gov.uk/find-pension-contact-details

6 6 You may be able to take your benefits earlier or later than your scheme s normal retirement date. In either case you should contact your scheme administrator to discuss these options. To understand how your defined-benefit scheme pension works and to estimate your likely retirement income, contact the employer that offered the scheme. They should be able to answer your questions in detail. We cannot help you with this type of scheme. You could transfer the benefits of your defined-benefit pension to another scheme. If this is something you re looking to do then you ll normally need to get financial advice. We recommend you always get professional advice if you ve been offered a sum of money to give up this type of benefit. 2. Defined-contribution schemes also called money-purchase schemes In this type of scheme you build up your pension fund by investing personal or employer contributions (or both) while you re a member. These contributions grow to provide a pot of money, which you could use to buy a pension income. It s important when accessing these funds that you make an active decision on what s best for you. Consider your options carefully and shop around for the best deal which could be in the form of an annuity. Guaranteed annuity rates Guaranteed annuity rates are special rates that some pension schemes offer. If you ve got one of these, you may see it referred to as a GAR. If your pension has one of these, it may mean it s linked to a very good annuity rate. It could give you a higher retirement income than any rate currently available through the open-market option. The downside with a GAR is that you often have no choice over the options included and it may restrict you as to when you must start taking the income. It s always good to compare the income generated by your GAR with that available if you shop around. If you decide not to take up the GAR you will lose the option of the guarantee. You ll need to get financial advice if you decide to do this. State Pension If you ve reached State Pension age on or after 6 April 2016 you ll be entitled to receive the new State Pension. The full new State Pension for 2019/2020 is per week. This will apply to men born on or after 6 April 1951, and women born on or after 6 April However, the amount may be lower, depending on your National Insurance (NI) contributions. It may also change if you have previously contracted out at any point. You ll usually need at least 10 years of qualifying NI contributions to get anything. You ll need to have at least 35 qualifying years worth of contributions to receive the full pension. Your NI record will decide the exact figure. To find out more, please visit: gov.uk/new-state-pension This link takes you to: information on the new State Pension, including eligibility criteria instructions on how to claim your entitlement and how it s worked out, and the relevant details to get an estimate of how much State Pension you should qualify to receive and when. If you reached State Pension age before 6 April 2016 then the maximum you can receive is the full basic State Pension, which for the 2019/2020 tax year is per week. If you don t qualify for a full basic State Pension, you may be able to top up your State Pension to per week if you re married or in a civil partnership, through your partner s NI contributions. Eligibility conditions do apply. You can find out more and check how much you d qualify for by visiting: gov.uk/state-pension/eligibility Other savings You may use all or most of your pension pot to buy an annuity. You may also have other forms of savings besides your pension pot. These might include cash in the form of bank or building society accounts, shares, bonds, ISAs, property or a variety of other savings or investment plans. They re all worth considering as each could help create extra money for your retirement. Or you could keep these as a rainy-day fund.

7 7 3. Find out more about types of annuity There are different types of annuities designed to help you, depending on your retirement income needs. Lifetime annuities Lifetime annuities are designed to give you peace of mind and a guaranteed income for life, no matter how the financial markets perform. How much income will I get from an annuity? A number of factors affect the amount you receive from an annuity: The amount you have in your pension pot. Your age. Whether you take a tax-free cash lump sum and, if so, how much. If you take an initial taxable lump sum over and above the 25% tax-free cash amount though not all providers offer this facility. The annuity options you choose things like linking income to inflation, or providing for your loved ones. You can find more information about these options on pages 9 to 14. What about health and lifestyle? With an annuity, poor health and lifestyle could mean that you get a higher income. Everyone can get an income that is tailored to their own personal circumstances. Many providers will offer a bespoke annuity rate based on simple things, like your height and weight and postcode for where you live. Providers may also take into account fairly common factors such as smoking, the amount of alcohol you drink, and high cholesterol or blood pressure levels. So you could get a higher income even if you consider yourself to be healthy. Your income could be increased further if you suffer from medical conditions, such as diabetes through to more serious conditions such as cancer and heart disease.

8 8 Other types of annuity There are various other types of annuity available. We have explained these below. Our online annuity planner doesn t offer access to these other types of annuity. If you re considering one of these other products, you ll need to get financial advice. Investment-linked annuities This type of annuity takes your pension fund and converts it into a lifetime income. Unlike a normal lifetime annuity, you choose an underlying investment and the amount of income you receive will vary in line with the performance of the investment. Purchased life annuities This type of annuity will pay a guaranteed income either for life or for a fixed period of time. People usually buy purchased life annuities with savings or money from an inheritance or by using tax-free cash taken from a pension fund when they retire. A purchased life annuity gets taxed differently to a pension annuity. If you re considering either of these other types of annuity, we suggest you take financial advice. If you already use a financial adviser, we suggest you speak to them about the option that would be best for you. If you don t currently use a financial adviser, we can help you find one. Or you can visit the Personal Finance Society website at thepfs.org/ yourmoney/find-an-adviser

9 9 4. Structure your annuity to suit your needs There are several ways that you can tailor your annuity with our online annuity planner. Take a tax-free cash lump sum Taking a tax-free cash lump sum is a popular option. You can withdraw this tax-free cash (also known as a pension commencement lump sum ) from your pension pot before committing to an annuity. Some of the main points to bear in mind if you re thinking of doing this are shown below. You can take up to 25% of your pension fund as a tax-free cash lump sum at the start of your policy. You can then use the rest of your pension fund to buy an annuity that generates your retirement income. You can take less than 25% or even nothing at all it depends on your personal circumstances. Of course the more you take as tax-free cash, the less of your pension fund there ll be to create an income when you retire. Our online annuity planner will let you see the possible effect that your tax-free cash lump sum will have on your retirement income. Arrange when to receive your retirement income Annuities can pay your retirement income at a frequency that suits you every month, every three months, every six months or even every year. Here are some things to consider when choosing your frequency. You can either receive the payments upfront (in advance) or at the end of your payment frequency (in arrears). What you choose will depend on your circumstances. You ll also need to consider the effect your schedule may have on your cash flow when you are retired. Less-frequent income payments will mean budgeting for longer periods. Payment will stop once you die unless you have included a death benefit. (See the section Provide for loved ones on page 11.) You may be able to vary your annuity income if your chosen annuity provider offers this option. For example, you might be able to take a higher initial income payment and then reduce it at a later date. The diagram below shows how different payment options and timings work, and when you would receive your first payment. Explaining frequency and timings January February March April May June Policy starts All in advance Every month in arrears Every three months in arrears Every six months in arrears Policy terms continue until death Annuity holder dies

10 10 Protect your income against inflation It s worth considering how inflation could eat into your annuity income over time. The real value of your income could gradually reduce. Many people who have retired find one of the biggest financial challenges in retirement is budgeting to live on a fixed income. You can choose for your annuity income to stay the same each year, this is called level income. This annuity option will mean that, in effect, you receive a higher starting income, but as the cost of living (inflation) rises your income will buy you less over time. Or, you can choose for your income payments to increase each year by a certain percentage, or in line with inflation using the Retail Prices Index. (If you choose the inflation option, you ll need to call us.) This is called escalation. You would receive a lower starting income compared with a level annuity. Then your income would increase each year to help offset some, or all, of the effects of inflation. With escalation, if your income is linked to the Retail Prices Index, you must remember that when prices fall, your income will also fall. You can protect against this, by choosing the with floor option or a fixed-percentage increase. The graph below shows how the level income option may compare with an income linked to inflation. You can see how the inflation-linked option will reduce your income initially but increase each year after this. Level income will be higher at first but won t increase over time. Our online annuity planner will give you quotes for different levels of inflation protection and you ll be able to see the possible effect on your income from the available options. The planner doesn t compare all the options so please call us to ask about other inflation-linked options. Explaining inflation-proofing options Regular income Level 3% 5% RPI Years

11 11 Provide for your loved ones An annuity pays you a regular income for life. Then once you die, your payments will usually stop (this is known as a single-life annuity). You can add options to make sure a loved one continues to benefit from your annuity income after you ve passed away. Joint-life annuity The main option for this is a dependant s pension, also known as a joint-life annuity. This will pay a percentage of your income, usually 50%, 66% or 100%, to a financial dependant if you die before them. The higher the percentage you choose to pay your dependant, the more your income will be affected. Some providers offer you the option to have someone other than a financial dependant, called a nominee, as a beneficiary on an annuity plan. A payment made to a nominee is called a beneficiary s pension. The diagram below shows how this option works. Our online annuity planner will give you quotes for 0%, 50% or 100% dependant s pension so you can see the possible effect on your income. Please call us to find out more about any other percentages (of a dependant s pension) that you may want to get quotes on. Our online annuity planner can only provide a quotation if your dependant is aged over 50, so if your dependant is younger than this, please call us on the number below. Explaining joint-life annuity options At the start you can choose for a percentage of your pension to be paid to your husband or wife, civil partner, or another person who is financially dependent on you, after your death. You can choose different percentages of your income. The higher the dependant s pension you choose, the lower the annuity income will be. Year 1 Year 2 Year 3 Year 4 Year 5 No joint-life annuity pension annuity being paid 50% joint-life annuity pension annuity being paid 100% joint-life annuity pension annuity being paid Annuity holder dies Husband, wife or partner continue being paid 50% of your pension annuity until their death Husband, wife or partner continue being paid 100% of your pension annuity until their death Policy terms continue until death Dependant s death

12 12 Guarantee period Your annuity provider will pay an annuity income for as long as you live. But, if you re in poor health or worried you may not get the best value, you can choose a guarantee period of up to 30 years. This makes sure that if you die within that period, your annuity will continue to be paid to your chosen beneficiary (or beneficiaries), for the rest of the selected period. Your guarantee period starts at the same time as your annuity plan starts. You can choose (nominate) anyone to receive the income during a guarantee period, either through your annuity provider or in your will. Your beneficiaries may also be dependants those closest to you who depend on you financially, such as your partner, husband, wife or children. Beneficiaries don t have to be dependants and can be anyone you choose to receive your annuity income during the guarantee period. The diagram below shows how this option works. Our online annuity planner provides quotes for various guarantee periods. You ll be able to compare the possible effect on your income of choosing different options. The planner doesn t compare all options, so please call us to ask about other guarantee periods. Explaining guarantee periods At the start you can choose to include a guarantee period, which will start at the same time as your annuity plan starts. If you were to die before the end of the guarantee period, payments would continue to be made to your nominated beneficiary for the rest of the guarantee period. Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 No guarantee Annuity holder dies 5-year guarantee Your beneficiaries continue to receive your income for the rest of the 5-year guarantee period. Your beneficiaries continue to receive 10-year your income for the rest of the 10-year guarantee guarantee period. You may outlive your guarantee 10-year period. Your pension payments guarantee continue until you die. Annuity holder dies

13 13 Choosing a joint-life annuity and a guarantee period With some annuities, you can choose both a joint-life annuity and a guarantee period. If you die within the guarantee period, your nominated beneficiary could receive both payments at the same time. This is called with overlap. If you prefer, you can choose to make the payments one after the other. We would pay any remaining guarantee period first, and the joint-life annuity would start at the end of the guarantee period. This is called without overlap. The diagram below highlights how this works. Explaining with and without overlap If you choose both a guarantee period and a dependant s pension, there is the possibility that both options could be activated at the same time. If this happens, you can choose whether they overlap and provide your beneficiaries with two incomes or run consecutively. Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 With overlap Guarantee period chosen for 5 years Without overlap Annuity holder dies Annuity holder dies Your beneficiaries continue to receive your income for the rest of the guarantee period. Dependant s pension with overlap. As well as the guarantee payments from your pension, your dependants start to receive the dependant s income until their death. Your beneficiaries continue to receive Guarantee period your income for the rest of the chosen for 5 years guarantee period. No income Your dependants start to receive their annuity income until their death. Dependant s death Dependant s death

14 14 Value protection Value protection pays a lump sum to your beneficiaries if you die before receiving the full value of your pension fund. When you take out your annuity, you can choose to protect a percentage of your pension fund, right up to 100%. Please call us to ask about other amounts of value protection which are not in the options included on our online annuity planner. Our planner doesn t compare all annuity options. The lump sum your provider will pay when you die will be the percentage that you ve protected minus the total gross annuity income you ve already received. If you ve chosen this option and you die before the age of 75, your provider will pay the lump sum to your beneficiary tax-free. If you die after the age of 75, your beneficiary will pay tax on the lump sum at their marginal rate. Some providers limit value protection so that they only pay it if you die within a certain time period, for example before your 75th birthday. Explaining value protection Annuity income received Amount of pensions protected at outset Year 1 Year 2 Year 3 Year 4 0% 50% 100% Annuity holder dies Value protection benefit pays a lump sum Your beneficiaries will receive the selected percentage of your pension fund after your tax-free lump sum, minus any income payments made (before tax), if this applies. Your beneficiaries will receive 100% of any pension left (in other words not already received as income) less any tax, if this applies. Important things to consider Once you ve set up your pension annuity, it s not possible to change the structure. So the choices you make on areas such as death benefits, payment schedule and inflation allowance are fixed. This means that once your cancellation period has passed, you won t be able to change your mind. Also, you ll no longer be able to access the money you used to buy the annuity as it ll already be providing your regular income. Researching and understanding your options is central to making the right decisions for your retirement. Marginal tax rate This is the tax band that you enter after counting all income, including withdrawals from your pension. Marginal tax rates vary depending on your level of income. The rate doesn t increase for your entire income, just for each amount above a certain threshold.

15 15 5. How to use our online annuity planner We ve designed our online annuity planner to help you shop around for the best annuity income. Once you ve entered your personal details, simply compare quotes from the market providers. To get quotations designed for you, you ll need to give us some personal information such as: your contact details, the value of your pension pot (or pots), and details of your health and lifestyle. The health and lifestyle questions let us work out if you could qualify for a higher income. Even minor medical conditions, like raised blood pressure or high cholesterol levels, or if you smoke, could increase your income each year. Retirement is the one time when your medical and lifestyle situation could really improve your lifetime income. So, let us know everything that you think might help us get you a better rate. What happens next? Once you ve given us your details, you ll receive quotes from all the annuity providers on the open market. Please compare these quotes with the annuity quote from your pension provider. If you want to get an application pack for your chosen quote, you can get this using our online service, or by calling us. If you d prefer to get some advice on your decision first, we can put you in touch with an expert who will charge a fee. Remember you can also visit the Personal Finance Society website to find an adviser, at thepfs.org/ yourmoney/find-an-adviser Go to: hubfsp.co.uk to use the annuity planner. Click the start button, then enter your details to get your quotes.

16 16 6. What happens when you apply for an annuity? When you receive your application pack, the next step is to read the information carefully. Once you re happy to go ahead, you ll need to fill in the application form and return it to us. We ll then help to make sure the process is as smooth and straightforward as possible. You could start receiving your retirement income within four weeks from the day we receive your application. However, please be aware that the speed with which your annuity is set up depends on how quickly your pension provider transfers the funds to your chosen annuity provider. Remember, if you want help at any stage, just call us on the number below. Step 1 Step 2 Step 3 Step 4 Apply for an annuity. Receive your information pack and read it carefully. fill in the application form and return it to us. Your pension provider transfers funds to your chosen annuity provider.

17 17 7. Other ways you can get a retirement income An annuity can guarantee an income for life, but isn t the only option you have to provide yourself with an income in retirement. There are other options. However, you may want to consider how long you want your retirement income to last for. We re generally living longer, so if you re in your 60s, you could have 30 more years of retirement to look forward to. Cash if you have pension savings, you re now able to take all of the money as a cash lump sum, or as a series of lump sums. But remember, only the first 25% is tax-free. If you cash in the rest of your pension pot, it would be taxed at your highest marginal rate and could also push you into a higher tax bracket. You can see the effect of taking up to 25% of your pension savings as a tax-free cash lump sum with our online annuity planner. With a cash lump sum you get to choose what to do with your money and can spend or invest it accordingly. Drawdown this lets you keep your pension invested. You can still take your tax-free cash as a lump sum and then take an income from the remaining funds. This is called drawdown. Drawdown gives you a lot of flexibility, but you have the risk of running out of money over time if you take too much cash out initially. Remember your investments could go down as well as up. Stay invested or defer if you don t need to secure an income for your retirement just yet, you can choose to delay taking your pension income, or leave your pension savings invested. While your pension savings are invested, your provider will continue to charge administration fees. However, it s important to be aware that because your money stays invested, the value of your pension pot could go down as well as up. Use a combination of retirement income options you can create your own bespoke retirement solution by using a combination of the above options. Remember to consider an annuity if you re planning a combination-style approach to providing your retirement income. Our online annuity planner does not cover drawdown products, staying invested, deferring your pension income or using a combination of retirement income options. It s a good idea to get financial advice before considering any of these options as they involve an element of risk.

18 18 Still unsure? If you re not sure how to use your pension savings, why not take advantage of the free guidance available from the Government s Pension Wise service at pensionwise.gov.uk. Their website offers useful information on how to use your pension savings. Or, you can speak to your financial adviser. If you don t have a financial adviser, you can visit the Personal Finance Society website at thepfs.org/yourmoney/find-an-adviser to find one. Please note that advisers will charge for providing financial advice. Ready to convert your pension savings into a guaranteed income for retirement? If you ve decided that a guaranteed income for life is right for you, remember to shop around for the best rate. By shopping around for an annuity on the open market, and providing details of your health and lifestyle, you could get more income for your retirement. Our online annuity planner makes shopping around easy and lets you structure your annuity to suit your needs. You can provide for your loved ones after your death. You can protect your income against inflation. You can choose how often your annuity income is paid. Of course you re more than welcome to call us and we ll do it all for you. For more information or to book a TELEPHONE appointment: Call: Our UK-based team is available from 9am to 8pm, Monday to Friday (not including bank holidays). Calls are monitored for training and regulatory purposes, and call charges may apply. HUB Financial Solutions Limited. Registered office: Vale House, Roebuck Close, Bancroft Road, Reigate, Surrey RH2 7RU. Registered in England and Wales Number HUB Financial Solutions Limited is authorised and regulated by the Financial Conduct Authority. Part of Just Group plc. Please contact us if you would like this document in an alternative format /2019