Independent Financial Advisers and Pension Consultants

ARE YOU RETIRING SOON ?

The returns from annuities have declined dramatically since the early 90s. Ten years ago, a man aged 65 with a retirement fund of £100,000 from a personal pension, retirement annuity or executive pension could have bought himself a pension annuity of £14,430 per year.* In 2001, the same sum would provide today's 65 year old man with an income of only £8,997 per year, over a third less. For a 60 year old woman, the decline has been even greater, at nearly 45%. There are two main reasons for the transformation in annuity income: Long term interest rates have roughly halved, from around 10% in 1991 to just 5% today. Life expectancy has increased, so a pension for a person retiring this year is likely to be paid for several years longer. Fortunately, the fall in annuity income has been accompanied by a variety of changes in retirement options. Had you retired ten years ago, your choice would have been largely limited to a fixed annuity. Now you have a range of options: With Profit Annuities While the traditional fixed annuity is invested in fixed interest securities, the funds underlying with profit annuities are spread across equities, bonds and commercial property. In the long run this ought to mean superior returns and hence a higher income, although this better performance is not guaranteed. Under a with profit annuity, you choose an assumed rate for your future bonuses and your annuity payments will be based on this rate. The higher the rate you choose, the greater your initial income but the less will be the scope for growth. Most major companies now offer with profit annuities, although their features vary. Unit Linked Annuities The idea behind unit linked annuities is simple. Instead of the traditional annuity's promise of a regular fixed cash payment, the unit linked annuity provides a payment of a pre-determined number of units in your chosen investment funds. What you receive depends on the value of those units. Within a broad range you generally have scope to choose the initial level of income, in much the same way as you can under with profit annuities. The higher the initial payment, the less potential there is for future increases and the greater the possibility that income could fall. Pension Fund Withdrawal Pension fund withdrawal, or income drawdown as it is sometimes called, has grown considerably in popularity since it first appeared in 1995. As the names suggest, under this option you take your income by making regular withdrawals from your pension fund. You ultimately have to buy an annuity, but this can be deferred until as late as your 75th birthday. Pension fund withdrawal allows you to vary your income within broad limits set by the Inland Revenue, and this can be especially useful if you are phasing in your retirement. The lump sum death benefits are also generally more attractive than if you take an annuity. However, the investment risks associated with pension fund withdrawal mean that this option is probably only worth considering if your pension fund will not be your only major source of retirement income and you are therefore not wholly dependent on it. New 'Annuities' There is no Inland Revenue definition of what constitutes an annuity. This unusual fact has encouraged various companies to develop new retirement income products that have very little in common with the traditional fixed annuity. The latest example looks more like income drawdown, but can allow withdrawals to continue beyond age 75. Further innovation can be expected in this area in the near future. Making the right choice between all these options requires expert advice. Make the wrong decision and you could spend the rest of your life regretting it. *Source: Scottish Equitable, 2001

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