Variable annuities
Variable annuities are a relatively new
product to the UK and are similar to a guaranteed income
drawdown product.
Your fund remains invested but the insurer
offers you a guaranteed income for life.
Living Time
Another alternative to a standard Unsecured
Pension is ‘Living Time,’ which is an innovative form of income
drawdown. It pays a fixed income for a limited term of
five years or more, up to the age of 75, with a pre-agreed
maturity value.
This makes Living Time a half way house
between the extremes of locking your pension fund into an
annuity, or subjecting it to the vagaries of the stock
market, via income drawdown.
Living Time looks like a limited
period annuity, with a known maturity value, but it is
actually an Unsecured Pension which allows you to choose the
level of income you require and comes with a
pre-known maturity value.
While you can choose the level of income you
want, remember that the higher the income, the lower the
maturity value.
When your Living Time plan ends, you have a
maturity value with which to buy an annuity. Assuming that you
defer annuity purchase to age 75, you may qualify for a higher
annuity rate than at age 60 because you are older and possibly in
poor health and may qualify for an impaired life annuity (for
individuals with a reduced life expectancy).
In addition, if you have lost a spouse or
partner, you will be able to receive a higher income by purchasing
a single life annuity, rather than a joint life one.
Because we are living much longer, individuals
are increasingly splitting their retirement into two bits: pre and
post age 75. If you buy an annuity at age 65, you are irrevocably
locked in for life, irrespective of what happens to you later in
retirement.
With Living Time you can buy an annuity at age
75, which reflects your prevailing health, wealth and marital
status.
This is assuming that your circumstances have
changed by the time you want to buy an annuity. If they have not,
you might find that the annuity offered at age 75 does not match
your previous income.
What you have to weigh up is, if your pension
fund at 65 was £100,000 and your Living Time plan paid you £6,000 a
year, with a maturity value of £85,000 at 75, will the £85,000 be
sufficient to buy you the same income that you had enjoyed until
then?
Your Unsecured Pension is invested with AIG in
fixed interest securities and money market funds.
What happens if I die during the
contract?
If you die while taking any benefits
from a Living Time plan and before the maturity date, you have
three options:
- your spouse can continue receiving the Living
Time income;
- the remaining fund, less payments made to the
date of your death and less 35 per cent tax, can be paid to your
estate; or
- your spouse can use the remaining
fund to purchase an annuity
Another option is money-back (also known as
value-protected) annuities. These overcome one of the big
objections to annuities – the fear that you will die shortly
after buying an annuity and thereby losing your entire fund to the
insurance company.
With a money-back annuity, your estate
receives the purchase price of your pension fund, less
any payments made to the date of death and less 35 per
tax, but only if you die before 75.
Although this may seem a poor deal because of
the swingeing tax and the age 75 limit, money-back annuities
may suit individuals who are in poor health and who qualify for an
impaired life annuity.
For those in good health, a traditional
annuity with a 10-year guarantee is usually a better way of buying
value protection, as the guarantee can continue to apply after the
age of 75 (assuming that you buy the annuity with a guarantee after
65).
But some experts believe that even those with
impaired lives would be better off using traditional annuities.
For example, a single person without
dependants who is eligible for an impaired life annuity might be
better off with an ordinary, impaired life annuity to maximise
income during their lifetime because the cost of buying value
protection reduces the amount of income payable.
Even if you have a spouse, an ordinary
impaired life annuity, with two thirds spouse's pension, may be a
better bet than an impaired life, money back annuity, because the
former will pay your spouse a pension for life, whereas the latter
will only pay the remaining fund to your estate if you die before
age 75.
Mix and match
The aim of this guide is to show you that you
don't necessarily have to settle for either an annuity, or an
Unsecured Pension.
There are other options and you can mix and
match your pension fund and other savings to give you maximum
flexibility, during a retirement which is likely to last for 20 to
30 years.
Seek advice
Be sure to take independent financial advice
to ensure that you maximise your investments and get the best
possible deal for your retirement income.
These products are complex and you need to
check that the investment risk, time horizon, tax treatment and
other features of the plan dovetail with your requirements.
If you are purchasing an annuity, it is a
decision for life. Once signed up, you cannot switch to another
provider.