When it comes to converting your pension into income upon retirement, one straightforward and commonly chosen option is an annuity.
Previously, it was mandatory to purchase an annuity before turning 75. However, now individuals have the freedom to explore other options, such as a pension scheme.
You have the choice to buy an annuity using the lump sum from your pension scheme, whether you decide to take the full amount or only a portion.
It’s crucial to consider this decision as you approach the release of your pension. Although your pension provider may offer you an annuity, you are not obligated to accept it. There are multiple providers competing in the open market.
An annuity is an agreement between an insurance company and a member of a pension scheme. In exchange for a lump sum, the insurance company provides a yearly income.
The income from an annuity is guaranteed for the duration of your life. The amount you receive regularly is based on various factors, including the insurer’s estimate of your life expectancy, current annuity rates, and your initial payment.
The benefits and drawbacks of an annuity depend on the specific type of annuity chosen and your individual circumstances. While there are some common advantages and disadvantages, not all of them may be relevant to your situation. We can help you navigate these considerations and make an informed decision.
Pros and Cons of annuities
• A wide range of annuities are available, in order to suit your needs, including joint life annuities;
• A regular income for as long as you live, in addition to your state pension or any other pension scheme;
• Income paid at intervals to suit your needs.
• Most annuities are relatively inflexible, meaning you are tied the to the policy for the duration of your retirement;
• Annuity rates are based on expected life span, which can be affected by factors outside of your control, such as your postcode – a higher life expectancy means a lower annuity (annuities can no longer be affected by your gender, as of 2012);
• Annuity rates are affected by the economy, which can reduce the amount that you receive from your pension depending on when you buy it;
• Unless you have selected a spouse pension or guarantee, your annuity payments cease on death, no matter how much or little of your annuity you were paid.
Choosing the right annuity requires careful consideration due to the various policies, rates, restrictions, and benefits involved.
As independent financial advisers in Scotland, we can assist you in navigating this complex landscape and find the optimal solution that suits your needs.
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