Annuities – what are they?
Annuities can be bought if you have a money purchase pension scheme. The cash you save into it can be used to bought an annuity. This effectively means that you can ‘unlock’ the money that you have put into your pension fund early.

The amount you will receive from your annuity will depend on your age, sex and medical history along with the current annuity rate. The largest factor here is an annuity rate which has effectively halved over the past ten years.

Annuity Rates
The annuity rate is a crucial one because it decides how much income the person will have for the rest of their life. Annuity providers tend to invest in safe stock such as government stock. The rates of interest they earn on this stock is closely tied to the Bank of England’s base interest rate.

The current base interest rate is relatively low meaning that the return on investment for the annuity providers is low. This means that the annuity rates will also be low. Today’s rates are at around half the level of ten years ago.

What are my options?
With annuity rates at a poor level, you may want to think about alternative retirement options. When you reach the retirement age, your pension scheme manager will write a letter outlining the annuity rate they are offering. However, you have the right to ‘shop around’ to get a better rate.

It is also worth noting that members of personal pensions and stakeholder schemes are allowed to take up to 25% of their fund tax-free. However, if you take a tax-free sum, you are normally obliged to buy an annuity with the remaining monies in your fund.

Do I have to take an annuity?
No – as of 6th April 2006, you do not have to buy an annuity. Instead, you can draw an income directly from your pension fund and leave the pension cash in investments. However, note that any money left in your pension fund when you die will be subject to inheritance tax (IHT) charges therefore it is important to plan your retirement carefully.

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