Before we look at the various options that are available for annuity purchase we should first consider what you wish to achieve in terms of income and benefit options and also where the funds will come from in order to complete the purchase.
The majority of annuity policies that are purchased in the UK are done so with the funds from a pension scheme. As an incentive for us to save for our retirement, the government allows tax relief on our contributions to a pension scheme at our marginal rate. Even those who do not earn enough to pay the tax can receive tax relief on contributions up to $3,600 per year. The funds are then allowed to grow in a tax efficient environment until you retire which can be any time after you reach the age of 55. At the point of retirement, you then have a pot of money with which to secure an income payment to last throughout your retirement. You may receive up to 25% of the fund as tax-free cash but the balance of the funds must then be used to purchase a or to move into Income Drawdown.
Purchased Life Annuity When someone requires an income but has no pension fund they can choose instead to purchase an annuity with their own savings and investments. This type of plan is a purchased Life Annuity. The main difference between this and a lifetime annuity is tax treatment. A purchased life annuity is partially a refund of capital and partially interest from the investment. Therefore only the interest element is subject to tax and would be taxed as investment income. Pension or Lifetime Annuities are considered income and are therefore taxed as earned income.
Standard Annuity This is the most basic annuity for your pension funds to purchase. In return for your fund, you will secure an income that will be guaranteed for the rest of your life. If no options are included the income that this plant produces will be a level income payable until you die whether this
Enhanced Annuity essentially the same as a standard annuity however some provider off a high level of income based on certain lifestyle choices such a smoking, drinking or being overweight or medical history. In some instances the income level may be up to 40% higher than they would be offered on a standard plan.
Other types of annuity these include investment-linked plans and with profit annuities who aim to provide a level of income that is higher than a standard annuity but will involve a certain level of investment risk. Fixed term annuities off more flexibility because they have a maturity date that will allow you to make further choices in the future.
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