Providers and advisers are awaiting a decision from the Inland Revenue as to whether a possible loophole in the law will allow annuities to offer a money back guarantee.
Understanding Pension Benefits - The Basics - In general terms, each person in the UK is required at their official retirement date to take their pension benefits as a combination of: Regular pension income for life and a tax free cash lump sum. You can arrange to not receive a tax free cash lump sum to increase the amount of regular pension income you receive.
What exactly happens at retirement? When you reach your retirement you cash in your pension i.e. retire, even if you continue working, you are required to use the majority of your pension fund to buy an income. In simple terms, you keep part as a tax free lump sum and part is given to a pensions company who pay you an income for the rest of your life, this is called the annuity.
The rate of income interest (annuity) varies according to your age, your health, the type of income you require and interest rates at the time.
What happens on my death? If your pension has not started paying out, it may be paid to your estate generally free of inheritance tax. If you have purchased your annuity and it is in payment, on death the fund will be retained as a windfall by the pension annuity provider unless you built in some form of guaranteed payment period or spouses pension benefit for after death.
Avoiding the 'Windfall' Loss. There are currently 'at retirement' schemes called "Pension Fund Withdrawal Schemes", sometimes known as 'income drawdown' that defer the annuity purchase, however, if you have already bought your annuity you cannot avoid this risk. This is why the industry is keen for reform so that people will be actively encouraged to save in the security of knowing that they their families or estate will not lose out on their death.
To request our factsheet on At Retirement - Your Options or Unlocking Cash from Your Pension please contact us.
For more on pensions visit Pensions Adviser.com.
To learn about other types of annuity visit Savings Adviser.com.
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