Pension Annuity Vital To Take The Open Market Option

Annuities are a form of insurance, called longevity insurance. A person buying an annuity with their pension savings has a guarantee that their pension will continue to be paid no matter how long they live after their retirement date. For most pensioners/retirees buying an annuity will be a better choice than income drawdown (unsecured pension), and under current rules it becomes compulsory at age 75. There is no obligation to take the annuity offer from the pension fund manager used when saving for the pension, in fact shopping around for the best annuity rate using the open market option will often yield more retirement income.

Many people feel confused by annuities, and simply go with the first deal they are offered, which will be from the company they used when saving for their pension. This is quite unfortunate, as research has shown that annuity rates can vary by up to 40 per cent between providers.

Each retiree must make a number of decisions about what to do with their pension fund on retirement. According to the current legislation, these decisions must be made between the ages of 55 and 75.

Part of the pension pot may be withdrawn immediately as a tax free lump sum. This is normally limited to 25 per cent of the total, although those with very small funds are allowed to withdraw 100 per cent. The remainder of the fund can then either be slowly withdrawn, or an annuity can be purchased.

The first of these options is often called income drawdown, although the latest official name is Unsecured Pension (USP). The problem with USPs (over the longer term) can be seen in the case of a pensioner who chooses to take 5 per cent out of his fund every year. If he then lives for 20 years after retiring, he will have no pension left to live on.

So, although income drawdown/USPs are permitted under the rules, it is always recommended that regular financial advice should be taken. Normally there will be a point at which purchasing a pension annuity becomes the best option, and under current rules annuities must be purchased at age 75.

Most people will receive a pension annuity offer from their pension fund provider when they reach retirement age. The pension annuity is a type of insurance policy, basically it is insurance against living too long and running out of money (longevity insurance). Annuities give a guaranteed income for life, in return for the retiree's pension savings.

Annuities are provided by life assurance firms, and it is the life firm that bears the risk that the pensioner may live for a long time after retirement. In this case the firm will lose money, as they will have to pay out more money than they received originally, but for them that is balanced by other pension annuity customers who die earlier than the average time.