What are the Alternatives to Annuities?
It seems that wherever one looks in the media at the moment a commentator, government minister or journalist is stepping forward to tell us how awful annuities are and posing the question: why are annuities so bad?
This, therefore is an important statement that should be absorbed before we continue; not all annuities are bad, some offer good value for money and many policy holders are happy with their choice of product.
Some savers with policies have been busy asking themselves ‘how much is my annuity worth’, and at least a few will have been pleasantly surprised by the answer. Others will be demanding to know ‘how do I sell my annuity?’
Ok. That’s that out of the way and the reason in this blog that there is a brief spell of objectivity is simple. If we are discussing the alternatives to annuities we should not start from the standpoint that they are all bad.
What do I need a policy to do?
For those of you who are asking: What is an annuity? It is a policy that used to be compulsory for most pensioners, sold by insurance companies, which guaranteed a fixed, monthly income for life in return for ones entire pension pot.
The role of any policy or plan that acts as an alternative to an annuity is simple, it has to last as long as you do.
An annuity will expire on the policy holder’s death, a factor that makes it attractive as it is a guaranteed income for life and will not run out before we head off to meet the great financial advisor in the sky.
Having the option of income drawdown presents savers with new options for finding more flexible retirement finance arrangements and one of the chief concerns for many is to limit the amount of tax liabilities on their lump sum.
On retirement, it was previously compulsory to buy a policy from an insurer unless one was lucky enough to have a final salary pension.
Now, as the restrictions have been removed savers have a number of choices when it comes to accessing their lump sum, a process which is referred to as ‘pension drawdown’.
Before April this year there were two main types of drawdown, capped and flexible. Capped drawdown meant that you could withdraw up to 150 percent of the amount per annum that you would have received each year if you had decided to purchase an annuity.
A flexible draw down enabled you to withdraw per year as much as you liked. There were more risks with the latter policy, but the risk was limited as your income from other sources needed to exceed £12,000 a year in order to be eligible for it.
Now the drawdown schemes have been simplified and replaced withflexi-access drawdown, which allows pensioners to take a quarter of their pot tax free in a lump sum withdrawal.
Subsequent withdrawals after the 25 percent tax free chunk are taxed at the standard income tax rates. If in a tax year you withdraw just£10,600 it will be tax free and the next £31,785 will be taxed at twenty percent.
If you’ve already been part of a capped or flexible drawdown plan, as of April 2016 these plans will convert to the new flexi-access scheme.
If, before now you’ve been wondering ‘what is an annuity’ or ‘how do I sell my annuity?’ it might be worth getting some professional advice on annuity policies, drawdown schemes or other alternatives.