William Burrows Annuities
Table of Contents:
Annuities and Pension Drawdown for individual
clients
Annuities - Some like them, some don't
Annuity Options
William Burrows Annuities
More Information
Annuities and Pension Drawdown for individual clients
"An annuity is a very serious business; it comes over and over every year, and there is no getting rid of it", wrote Jane Austen in Sense and Sensibility. If an annuity was a serious business in the 19th century it is even more so today, with over 200,000 people buying annuities every year, with a total value of over £6 billion. More people will be buying annuities in the future as anybody who has a personal pension must buy an annuity and most company money purchase schemes buy annuities for their members.
Annuities - Some like them, some don't
Annuities are the only type of policy that guarantee an income for the rest of your life. However, in return for this lifetime income guarantee you relinquish control over your capital. The concept of an annuity was set out in the legal case, "Perrin v Dickinson (1929)" as meaning to use capital to buy income.
Annuities are based on the concept of mortality cross subsidy. This means that those who live longer than their normal life expectancy are subsidised by those who die earlier than expected. At first this may not seem fair, but on closer reflection it is a very valuable benefit as it ensures that you will not run out of income if you live past normal life expectancy.
However there are many people who for understandable reasons do not like the idea of buying an annuity and losing control of their assets. If you don't want a traditional annuity, and have a more substantial pension fund, you can take adventure of one of the new types of "flexible annuities" or "pension drawdown" Although the Government seems set against abolishing the compulsion to buy an annuity, it is committed to encouraging more innovation in the annuity market, so we can expect some important new developments in the future.
Types of Annuities - Most annuities are purchased from pension funds, but you can buy an annuity from your own capital; these are known as "Purchased Life Annuities". Other types of annuities are:
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Compulsory Purchase Annuities (CPA) - These are bought from company pension schemes, including Executive Schemes, Section 32 policies and AVCs. Any tax-free cash and the maximum pension limit are subject to the pension scheme rules. |
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Open Market Option (OMO) - Purchased mainly from self employed and personal pensions. The tax-free cash is normally 25% of the fund (except of the pension was originally a company pension), and there are no limits on the income level. |
Taking the open market option - When you retire you do not have to buy your annuity from the company which holds your pension policy company you are currently with. You have the right to buy your annuity from another company of it is offering a better rate. This is called "The Open Market Option". Annuity rates can vary as much as 25% form the best to the worst so it is a very important option and there is no extra charge for exercising the Open Market Option.
You can check for the best annuity rates on our web site www.askannuity.com.
Single or Joint - A single life annuity pays more income but it stops when you die. If you have a joint life annuity and you die first, your spouse will continue to receive a proportion of your income, normally 2/3rds or 50%. You should consider a joint life annuity if you are married or have dependants.
Guarantee Periods - If you select a 5 year guarantee period and you die after 2 years, your family will be paid the balance of the guarantee period, i.e. another 3 years' of income. The maximum guarantee period is 10 years, but 5 years is the most common.
Level or increasing income - A level annuity pays the same amount of income for life, while an increasing annuity will start lower but will increase each year by either a fixed amount, normally 3%, or in line with inflation as measured by the Retail Price Index .It is only natural to want the most income at the start, but think seriously about an escalating income as inflation will reduce the value of your pension.
If you have a company pension, part of your pension might have to include escalation in accordance with the scheme rules. There are also special rules for any contracted-out benefits.
With Profits Annuities - They combine the advantages of an income for life with the advantages of investing in the stockmarket. Each year your income is adjusted according to the level of with-profit bonuses. If these are higher than anticipated your income will rise, if they are lower your income will fall. They are more risky than standard annuities but do provide the opportunity for longer- term income growth.
Impaired Life Annuities - If you have a medical condition which reduces your normal life expectancy you may qualify for a better annuity rate. You may also qualify for a higher annuity of you smoke, have diabetes or meet other criteria.
Flexible Annuities- These new generation of annuities combine some of the advantages of annuities with the flexibility of pension drawdown. Typically these policies provide income flexibility and choice of death benefits and investment control.
Pension Drawdown - this allows you to take your tax-free cash entitlement, deger your annuity purchase until your are 75 and in the meantime draw an income from your pension fund.
Income limits are set by the Government Actuaries Department (GAD), and you can vary your income providing it is within these limits, which are reviewed every three years.
Your fund remains invested, and will continue benefiting from the tax advantages of a pension fund. You also have control over the investment strategy. If you die during pension drawdown, the remaining balance can be paid in the following ways:
1. As a lump sum payment, less 35% tax;
2. As an annuity for your dependants; or
3. Your dependants can continue with drawdown until the policyholder would
have reached 75.
Although pension drawdown offers more flexibility and better death benefits
than an annuity you will be exposed to more risk. It is important to remember
that if you withdraw too much income or your investments do not perform
well enough or annuity rates fall significantly you will eventually end
up with a smaller annuity than if you had bought an annuity at the outset.
William Burrows Annuities (WBA) is a division of Aspen Individual Clients Limited, which is part of Aspen (Actuaries & Pension Consultants) plc. Together we have a rare combination of skills. Aspen has a wealth of experience in advising both company and individuals on their arrangements, while WBA is a specialist annuity adviser. In addition to personally advising clients, William Burrows writes extensively about annuities, is frequently referred to in the financial media and is often consulted on new product development and the future for annuities.
As a firm of professional advisers we normally charge fees for the amount of time we spend advising you. We always discuss fees before we are engaged so there are no hidden surprises. However we can agree to take commissions in lieu of fees
William Burrows Annuities is a trading name of Aspen Individual Clients Limited (AIC), an Independent Financial Adviser which advises private clients on all aspects of pension and investment matters. AIC is the Appointed Representative of Aspen (Actuaries & Pension Consultants) plc which is authorised by the Financial Services Authority (FSA).
This short introduction to annuities and pension drawdown only scratches the surface of a very complex and important subject, so please feel free to e-mail billy.burrows@aspen-plc.co.uk or call us on 0207 421 4545. You can also visit our website at www.askannuity.com for more information.
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