One Foot in the Market Place; Deciding Whether to Buy or Not to Buy an Annuity - the Decision Does Make Matters Less Simple but in Practice It Could Make Life Far Easier for Pension Holders One Foot in the Grave Cap in Here Please - Pic Ordere in the Second of a Five-Part Series on the Government's Wholesale Pension Legislation Changes, Trevor Law Looks at Annuities
To buy or not to buy? That is the question, because on 6 April 2006 the compulsory requirement to take an annuity with your pension fund at the age of 75 will no longer exist.
In recent years, one of the biggest drawbacks to pension provision has been that when you reach 75 you have to buy an annuity from an approved pension arrangement.
This has meant that pension capital that has been invested for perhaps many years suddenly passes to an annuity office to provide the client with an income for the rest of their lifetime.
This ensures a welcome security blanket of guaranteed income throughout your retirement no matter how long you live. But the downside is the ability to retain investment flexibility and control as well as the possibility of being able to pass down unused benefits to future generations does not exist.
From 6 April next year the Alternative Secured Pension (ASP), could, as the name suggests, provide an alternative to clients who wish to address these issues.
On what has been christened A-Day by the Inland Revenue in an uncharacteristic minor outburst of inventiveness, the Government's major pensions legislation overhaul aimed at simplifying this vast and complex sector of the financial market takes place. And amongst the many measures, the requirement to take an annuity at the age of 75 will cease.
Although in theory creating this alternative could make matters less simple, in practice it could make life far easier for pension holders.
Under current legislation the 75-year-old has to make a number of decisions when taking an annuity. Do they have a single life annuity or do they wish to provide for their spouse? Do they want a level or increasing income?
Any variation on a level, single life annuity, payable monthly significantly reduces the starting pension.
At age the age of 60, people are taking a gamble if they choose an annuity. If you have a pounds 300,000 pension fund and decide to include your wife, you would continue to receive pounds 15,432 a year if she died before you.
By comparison, you would be receiving pounds 19,104 income if you receive had you chosen a single life pension. If you die, the remaining pension fund would be lost.
ASP's mean for the first time a choice is on offer and you can avoid these decisions. There is the great advantage that any unused pension can be passed down to dependants. Leftover funds from people who die sooner than expected can be used to pay the incomes to dependants who live longer.
Clearly there are advantages of deferring annuity purchase until an individual's circumstances are clearer. We are all supposedly living longer. In 2001, the life expectancy at birth of females was 80. …