Pharmacists Choosing The Right Option At Retirement - Guaranteed Annuities
There are numerous options available to retiring pharmacists for producing income in retirement from your accumulated pension funds. In the first of a series of articles, we will take a look at guaranteed annuities.
First, what is an annuity? An annuity is a specified income payable at stated intervals for a fixed or a contingent period, often for the recipient's life, in consideration of a stipulated premium paid either in prior instalment payments or in a single payment.
Guaranteed annuities are still by far the most popular method of deriving retirement income. The principle reason for this popularity is that they do so without risk.
This guaranteed income can be structured in many different ways.
Regularity of payments
These tend to be monthly, quarterly, half-yearly or yearly.
Advance or arrears
your first payment comes at the beginning or end of the chosen period. By taking your payment in arrears, the level of pension payable will increase, although the difference will be marginal the more frequent the payment.
Guaranteed period
You can select for the pension to be payable for a minimum number of payments. Typically this will be for 5 years or a maximum of 10 years (a maximum of 5 years applies where benefits are being funded from Protected Rights funds)
Escalation in payment
You can choose for the pension to increase each year, either by a fixed percentage, by the value of Retail Price Index (RPI) or Average Earnings Index (AEI).
Widows / dependant’s provision
Where required, a pension may continue after the annuitants death. This will either be at the same level, effectively a joint lifetime pension, or on a reduced basis, typically at 50% or 2/3rds of the initial level. In regards to Protected Rights, where an individual is either married or in a civil partnership at the time of annuity purchase, a 50% dependant’s pension must be secured.
Death benefits may be provided in lump sum form via capital protected annuities, which provide the option of a lump sum upon death. This will equate to the purchase price of the annuity less pension instalments paid out, less 35% tax, although the protection ceases at age 75.
It should be borne in mind that when contemplating the inclusion of such features such as indexation or death benefits, these will be provided at the expense of a reduction in the initial income. Particularly when it comes to escalation of pension in payment, one should carefully consider the time before not only the pension attains the level of the equivalent non-indexed pension but also surpasses total income received.
Where a client is considering the guaranteed annuity route, one should remember that they enjoy an ability to exercise their open market option. This is an entitlement to ‘shop around’ for the best annuity rate. Regardless of which provider your pension fund is with, you should never take their initial offer of pension without researching what alternative providers can provide. Guaranteed annuity purchase is a one-time occurrence and cannot be undone. In doing so, at little time or expense, not insignificant improvements in pensions may be secured. An Independent Financial Adviser (IFA) such as ourselves is well positioned to carry out this for you.
What should not be ignored when undertaking research of the annuity market are lifestyle or impaired life annuities, which provide higher incomes to those who medically cannot expect a normal life expectancy due to their health. This similarly applies to smokers and those with above average height to weight ratios that may also qualify to receive higher than normal income levels. Depending upon the severity of any condition, substantial increases could be achieved.
The key benefit of annuities is the guaranteed income stream and lack of investment risk.
A disadvantage of annuities is that, unless relatively expensive death benefits are purchased at outset, the initial investment capital is lost upon death.
A further downside is that income for the duration is calculated based upon the age of the annuitant(s) at inception and their expected mortality. Therefore, younger retirees would be securing income at a relatively low level. However, the flip side of this is that there is no guarantee that a higher annuity rate will be secured by deferring the age at which an income is purchased. Indeed, given falling gilt yields and improvements in mortality experience, the long-term trend is of falling annuity rates. Therefore, there is a strong argument for considering annuity purchase sooner rather than later, particularly if you factor in the time to make good on the lost income by not doing so.
Clearly the considerations are numerous and are best made with the benefit of professional advice specific to an individual's own circumstances. However, once decisions are made in regards to these issues, an appropriate means of providing for income in retirement can be recommended. Should you require assistance in this regard, please do not hesitate to contact one of our Financial Services Partners, Steve Prosser, Jeff Crewdson or Chris Raggett to discuss your requirements more fully.
In the coming days, we shall the take the opportunity to cover further, alternative retirement vehicles through which pension income can be produced for retiring pharmacists.
Date of Article: 22nd July 2009
