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Questions about annuities

The March 2014 budget statement proposed changes to the way you will be able to take benefits from your pension from April 2015. 

If you require more information or advice as to how these changes may affect you, please speak to your financial intermediary.

If you don't have a financial intermediary or adviser, you can find one locally by using Unbiased.co.uk.

What is a pension plan?
How can I find out how much I have saved into my pension? 
How will my pension plan provide me with an income in retirement? 
Do I have to use my entire pension fund to buy an annuity?
What is a pension annuity?
Can an annuity be altered at a later date?
When do I need to make decisions for my retirement?
Do members of all types of pension schemes have to buy an annuity?
Do I have to purchase an annuity through my existing pension provider?
Do I have to take an annuity?
Where can I buy an annuity?
What income will I get in retirement?
I have a history of health conditions - can I still get an annuity?
What is the Lifetime Allowance?
What is a conventional pension annuity?
What is an enhanced annuity?
What is a fixed term annuity?
What is an investment-linked annuity?
What is a purchased life annuity?
What is a drawdown pension/ income drawdown / pension fund withdrawal?
What is the open market option?
Is there a difference between annuity providers?
Can I get a better annuity rate if I'm a smoker?
Can I get a better annuity rate if I suffer from an illness?
How can I get financial advice and where can I find a suitable financial adviser?
Will my partner get any money from my annuity when I die?
How safe is my annuity?

Q. What is a pension plan?

A.   A pension plan is a form of saving to provide an income in your retirement. There are broadly two types of pension plan available. One is a Defined Benefit pension, often referred to as a ‘final salary' scheme. This pays out a proportion of your salary as income payments when you retire. The other type of pension is a Defined Contribution pension, often referred to as a 'money purchase' scheme. This is where a certain amount  is paid into a pension fund (an investment vehicle for your money) and accumulates throughout your working life to provide you with a pot of money to secure a retirement income.

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Q. How can I find out how much I have saved into my pension?

A.   Each pension provider you have saved with during your working life should send you a pension statement outlining the current value and the expected or estimated value of your pension plan at retirement. If you don’t have any statements but you have details of your pension provider then contact them in the first instance. To trace lost pensions, you can use the Pension Tracing Service.

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Q. How will my pension plan provide me with an income in retirement?

A.   If you have a defined contribution pension, when you retire your pension will not automatically be converted into an income. You can use your pension pot to purchase an annuity or other financial product such as a drawdown pension. These products currently provide an income throughout your retirement. Click here to understand all the different ways to generate an income in retirement.

The March 2014 budget statement proposed changes to the way you will be able to take benefits from your pension from April 2015.

If you require more information or advice as to how these changes may affect you, please speak to your financial intermediary.

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Q. Do I have to use my entire pension fund to buy an annuity?

A.   No - you are usually able to take up to 25% of your pension pot as a tax free lump sum if you wish to. This is called the Pension Commencement Lump Sum or PCLS. It is important to note that you don’t have to take the 25%, you can take less or none - it purely depends on your personal circumstances. The more you take as your PCLS, the less of your pension fund there will be to generate an income for you.

However, under new rules following the March 2014 budget, if your pension pots across all your arrangements total £30,000 or less, you can take the whole of it as a lump sum from age 60. This has increased from £18,000. Pots of up to £10,000 each can also be taken as a lump sum (up to three such pots) from age 60. This is known as 'trivial commutation'.

If you do choose to take your entire pension pot or pots as a lump sum, this will not increase your tax-free entitlement. Therefore your tax-free entitlement will remain at 25%. The remainder will be taxed as income.

You can also leave your pension invested using a product called a drawdown pension. A drawdown pension allows you to draw some income  from your pension fund as an alternative to taking out an annuity. The maximum income you can take is set currently within government limits, although the March 2014 budget statement proposed to remove these limits from April 2015.

The March 2014 budget statement proposed changes to the way you will be able to take benefits from your pension from April 2015.

If you require more information or advice as to how these changes may affect you, please speak to your financial intermediary.

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Q. What is a pension annuity?

A.   A pension annuity is an income guaranteed to be paid to you for the rest of your life in the majority of cases, or for a fixed term in the case of a fixed term annuity.

During your working life your pension plan builds up a pot of money and it is this that is used to purchase a pension annuity. In return the annuity offers you a regular income guaranteed for life. There are several types of annuity:

Our Annuities section explains the advantages and disadvantages of each one.

You can also purchase an annuity with savings or a lump sum that isn't from a pension pot. This is called a Purchased Life Annuity.

The March 2014 budget statement proposed changes to the way you will be able to take benefits from your pension from April 2015.

If you require more information or advice as to how these changes may affect you, please speak to your financial intermediary. 

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Q. Can an annuity be altered at a later date?

A.   Once you have bought a conventional or enhanced annuity you can’t change it in any way. If you buy a fixed term annuity, you can change your benefits at the end of the plan term by reinvesting in another pension product. It is therefore important to consider your options carefully before buying an annuity. Our section on Annuities will help you to understand your options.

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Q. When do I need to make decisions for my retirement?

A.   It’s important to be thinking about your retirement as early as possible and plan ahead for retirement. You need to consider how much income your pension may provide in your retirement and then decide if you need to work longer, save more and begin to slow down, or potentially (if your savings allow) think about retiring early. A financial adviser can help you understand the income you could receive in retirement. If you don't have an adviser you can find one by visiting  Unbiased.co.uk.

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Q. Do members of all types of pension schemes have to buy an annuity?

A.   No. Currently annuities are only relevant to members of money purchase or defined contribution pension schemes.

If you are a member of a final salary or defined benefit scheme, the trustees of the scheme and your employer are responsible for ensuring that there is enough money available at the time you retire to pay your pension. To understand which type of scheme you are in you could ask your employer(s) or your pension scheme provider.

The March 2014 budget statement proposed changes to the way you will be able to take benefits from your pension from April 2015.

If you require more information or advice as to how these changes may affect you, please speak to your financial intermediary.

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Q. Do I have to purchase an annuity through my existing pension provider?

A.   No - you don’t. You can often obtain an improved income in retirement if you shop around.

This process is known as taking the Open Market Option. Shopping around will show you the variations there are in annuity rates.

The March 2014 budget statement proposed changes to the way you will be able to take benefits from your pension from April 2015.

If you require more information or advice as to how these changes may affect you, please speak to your financial intermediary.

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Q. Do I have to take an annuity?

A.   Not necessarily. It may be possible for you to draw your income directly from your pension fund. This is known as a drawdown pension.

It is important that you understand the advantages and disadvantages of this type of scheme. Drawdown pensions come with a number of additional risks and therefore before considering them we would recommend that you speak to a financial adviser.

The March 2014 budget statement proposed changes to the way you will be able to take benefits from your pension from April 2015.

If you require more information or advice as to how these changes may affect you, please speak to your financial intermediary.

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Q. Where can I buy an annuity?

A.   In the first instance we would recommend you contact your financial adviser who can contact annuity providers on your behalf.

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Q. What income will I get in retirement?

A.   This will depend on the product, your age, the options you choose and potentially your state of health, your lifestyle and postcode. We would recommend you contact your financial adviser who can contact pension providers on your behalf to obtain quotes for you.

The March 2014 budget statement proposed changes to the way you will be able to take benefits from your pension from April 2015.

If you require more information or advice as to how these changes may affect you, please speak to your financial intermediary.

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Q. I have a history of health conditions - can I still get an annuity?

A.   Yes – in fact by having certain medical conditions you may qualify for an enhanced annuity  that pays higher rates to people who may be generally unhealthy or have a lower than average life expectancy.

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Q. What is the Lifetime Allowance?

A. The Lifetime Allowance is the maximum value of pension savings an individual is allowed to draw without incurring tax penalties. The amount is set by the government and has been reduced for the tax year 2014/15, from £1.5m to £1.25m. The new maximum Lifetime Allowance applies from April 6th 2014. Whenever you draw benefits from a pension scheme, these are tested against the lifetime allowance and your pension provider will tell you the percentage of the lifetime allowance you have used.

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Q. What is a conventional pension annuity?

A.   This type of annuity uses your pension fund to provide you with an income that is guaranteed to be paid for the rest of your life.

You can tailor your annuity to better suit your needs, including how frequently you are paid, whether it is linked to inflation or not, and whether you make provisions for some or the entire annuity to provide for others when you die. Click here for more information.

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Q. What is an enhanced annuity?

A.   This is a type of conventional annuity that pays an increased level of income if your health or lifestyle reduces your life expectancy – for example if you are overweight, smoke or have suffered from an illness that affects your life expectancy. Annuity providers can effectively pay you more each year as they expect you to receive the income for fewer years than a healthy individual. You might also come across the term impaired annuity. Click here for more information.

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Q. What is a fixed term annuity?

A. It is a type of drawdown arrangement that gives you a guaranteed income for a fixed term. Currently the maximum amount of income you can take is set within government limits, although the March 2014 budget statement proposed to remove these limits from April 2015. In the case of Just Retirement's Fixed Term Annuity, if you survive until the end of the term you will receive a Guaranteed Maturity Amount (GMA) that you can reinvest in another appropriate pension product. 

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Q. What is an investment-linked annuity?

This is an annuity where your funds are invested, for example in a with profits fund. If the fund performs well, your income in retirement could increase, however, if it doesn’t perform well your income may be reduced. Click here for more information.

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Q. What is a purchased life annuity?

A.   A purchased life annuity is an annuity purchased with your own money, as opposed to a pension fund you have built up.  This could be bought with the tax free lump sum component of a pension, or savings you may have. These are subject to a different tax treatment.

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Q. What is a drawdown pension/ income drawdown / pension fund withdrawal?

A.   A drawdown pension (sometimes referred to as Pension Fund Withdrawal, or Unsecured Pension) is a product that allows you to draw your income directly from your pension fund. Your pension fund remains invested, as opposed to buying an annuity. Whilst there is no minimum income that has to be taken there are currently rules governing the maximum, although the March 2014 budget statement proposed to remove these limits from April 2015.  

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Q. What is the open market option?

A.   This is the right you have at retirement to shop around for a better annuity on the market.By shopping around, rather than staying with your pension provider, you could receive considerably more income in retirement.

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Q. Is there a difference between annuity providers?

A.   Deciding which provider to select is often driven by the income you receive and the features of the products offered. Some providers only offer certain benefits, while others don’t so it’s important to compare on a like for like basis. We recommend you speak to a financial adviser.

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Q. Can I get a better annuity rate if I'm a smoker?

A.   If you smoke cigarettes, cigars or tobacco regularly, you need to disclose this when requesting a quotation as this may qualify you for an enhanced annuity. Because your life expectancy may be reduced when compared to the average, some specialist providers may offer more income than is available from a standard annuity.

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Q. Can I get a better annuity rate if I suffer from an illness?

A.   Some illnesses do mean you qualify for an enhanced annuity rate. These are called enhanced annuities. Providers will often relate any illness to your life expectancy and if the illness may cause a reduction in your life expectancy when compared to the average, some specialist providers may offer more income than is available from a standard annuity.

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Q. How can I get financial advice and where can I find a suitable financial adviser?

A.   We do not provide any financial advice. To obtain financial advice and guidance we would recommend you contact your financial adviser. If you don’t currently have a financial adviser then you can use the ‘find an adviser’ service provided at Unbiased.co.uk

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Q. Will my partner get any money from my annuity when I die?

A.   This depends on how you set up your annuity at the outset. Most annuity providers offer you the option to continue to provide an income when you die. These options include a joint annuity, guarantee period and value protection. All of these options are described in our Annuities section.

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Q. How safe is my annuity?

A.   Conventional annuities or enhanced annuities are very safe financial products. The providers of annuities have to keep large amounts of capital aside to ensure they are able to meet their obligations to the industry regulators, the Financial Conduct Authority and the Prudential Regulation Authority.

If the worst were to happen and a company were to fail, then the Financial Services Compensation Scheme (FSCS) is the UK's statutory fund of last resort for customers of financial services firms. The FSCS can pay compensation to customers if a financial services firm is unable, or likely to be unable, to pay claims against it. Find out more on their website.

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A-Z of financial terms you may come across

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