Annuities in laterlife 

Taking money from the pension fund you have accumulated will be one of the most important financial decisions you make. A little time spent considering your options to make sure you get the best deal could earn you thousands of pounds in extra income. So how does it work?

When you decide to take benefits from your pension you will nearly always be able to take 25% of your fund as a tax free lump sum.

This is yours to do with as you wish: reduce your mortgage, invest, buy a new car, take a holiday. After this, your pension provides a taxable income as you require, either via an annuity or drawdown. An annuity offers you a fixed secure taxable income for the rest of your life in exchange for your capital. Drawdown on the other hand lets you keep your money invested in the market, and from this you draw a taxable income if required. With drawdown you get far more control over your pension than if you were to take an annuity, however it comes with far more risk. Unlike an annuity there are no guarantees. There is a danger that your pension fund could be depleted by falls in investment markets; taking too much income; or even just living a long life.

One of the most interesting new rules in April 2006 was the removal of the need to buy an annuity by age 75. A new option called Alternatively Secured Pension (ASP) allows you to keep your pension invested until you choose to buy an annuity or you die. ASP is similar to drawdown. If you die whilst in ASP, there are several options for the death benefits. If you have dependants, the fund must be made available to provide them with an income. However, if you have no dependants, the fund can be passed down to other people such as family members who have a SIPP in the same scheme as you, subject to a potential inheritance tax charge.

One word of caution on ASP: although the new legislation is clear that it is available to everyone, the Government has indicated that it may try to limit it to certain religious groups. Hargreaves Lansdown allow ASP in their SIPP because it is currently permitted but it is not possible to predict if, or how, this may change in the future – as always, tax rules and reliefs are subject to change.

In summary, if you are about to take retirement benefits from your pension, make sure you look into it properly. Getting a little help to ensure a good deal can be crucial.

Hargreaves Lansdown is an independent broker specialising in annuities and offers an online annuity supermarket, allowing you to search for competitive annuity rates for your personal circumstances from a panel of providers.

It’s free to get a quote – there’s no obligation to proceed. If you choose an annuity provider, Hargreaves Lansdown will handle all the paperwork for you to set up your annuity.

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