A lifetime annuity is a financial product that enables you to exchange some, or all, of your pension fund for a secure, regular income. With a conventional lifetime annuity, once you pass over your pension savings to an annuity provider, you’re guaranteed to receive a set amount of income each month for the rest of your life. However, once you have bought it, you cannot usually make any changes.
You can build in options such as a continuing income for your spouse or dependants when you die, a guarantee period which means if you die within that period your annuity income will continue to be paid to your nominated beneficiary, or ‘value protection’ which means that if you paid more for the annuity that you have received in annuity payments, your beneficiaries will receive the difference on your death. You can also choose to have your income increase over time, for example so it stays in line with the increase in inflation.
Other types of annuities are available, see also Investment-linked annuities and Fixed Term annuities.
Providers offer an annuity rate which will determine the level of income you can buy with your pension fund. The rate will be determined by features of the annuity in addition to your age, health and market conditions and can vary from one provider to another. Annuity rates also change over time so the rate for a 55 year old 12 months ago will be different for a 55 year old today.
When you’re offered an annuity rate, you can find out how much retirement income you’ll receive each year. For example, if you have a £100,000 pension pot after tax and the provider’s annuity rate is 4%, you’ll receive £4,000 a year.
These are items you own with monetary value. The main asset may be your home, but savings and investments, your car, land – even jewellery and home furnishings – are also classed as assets.
This is a government initiative which aims to help more people save for their retirement by requiring employers to automatically ‘enrol’ them into a workplace pension. Eligibility criteria is in place, so not everyone will qualify and it is still possible for workers to opt-out of their employer’s scheme. However, those who opt out will lose the benefit of their employer also paying into the scheme.
Defined benefit pension scheme
A Defined Benefit Pension Scheme pays a secure income for life which increases each year. It will usually continue to pay an income to your spouse, civil partner or dependants when you die.
The amount you receive is dependant on how many years you’ve worked for the company and been an active member of the pension scheme, along with your earnings. In these types of schemes, your employer is responsible for ensuring there’s enough money when you retire to provide you with your pension income. If this isn’t the case, protection is available from the Pension Protection Fund.
Defined contribution pension scheme
With this type of pension, a pot of money is built up which can then be used to provide you with an income in retirement. Contributions can be paid into the pension scheme by both you and your employer. The contributions attract tax relief and are then invested and the returns on the investments (which may be positive or negative) are reflected in your fund value.
You can choose to take a lump sum or income from your pension pot when you retire (or from age 55), without a restriction on the level of withdrawal, although only 25% can be taken tax free andthe rest is taxed as income.
It’s important to note that because your pension fund stays invested, this means its value can fall as well as rise – which could reduce the amount of income you receive or could result in your fund running out earlier than you’d anticipated.
Your estate isn’t just your home. It’s everything you own; including your land, savings and investments, and other assets of notable value (minus any debts, such as your mortgage).
Once you make a Will, you have to appoint an estate administrator or executor to carry out your wishes when you pass away. The executor will typically be a friend or family member.
Providing they’re willing and capable, they’ll take responsibility for paying any inheritance tax upon your death and oversee the distribution of any assets and gifts listed in your Will.
A financial adviser is a professional who can help you in areas such as investment, retirement and estate planning.
All our advisers are fully qualified and offer face-to-face financial advice. You can meet with your local financial adviser in a Skipton Building Society branch, your home or wherever is most convenient for you.
Fixed Term Annuities
A fixed term annuity enables you to switch some, or all, of your pension fund into a secure, regular income which is paid for a fixed term, usually between 3 and 20 years, as well as providing a maturity amount at the end of the term.
You can choose to build in annuity options such as a continuing pension for your spouse or dependants, increasing income (see Annuity) and the fixed term annuity can also be investment linked.
Inflation is the rate that the cost of living is rising or falling by, measured by the prices of goods and services.
Inheritance Tax (IHT)
This is payable upon your death if the value of your estate exceeds your nil rate band (see below). The amount over this threshold is charged at 40% and, in most cases, your loved ones would have to settle the bill.
We all have a nil rate band of £325,000, and if you’re married or in a civil partnership it’s £650,000. If you’re widowed, it’s up to £650,000 minus any allowance used when your partner passed away. In April 2017, a ‘residence nil rate band was gradually introduced, starting at £100,000 and eventually reaching £175,000 by April 2020. Through this additional allowance, you can only leave it to a direct descendant, such as a child or grandchild and it only covers residential properties you own – not buy to lets.
Investment Linked Annuities
This is a type of lifetime annuity, which once bought, are often difficult to change. With an investment linked annuity the level of income you receive is linked to the performance of either an investment fund, or the annuity providers’ with-profits fund, so it can go up and down over time. An investment linked annuity has a guaranteed minimum level of income and it cannot fall below this level. You can build in the same features as you can with a conventional lifetime annuity but investment linked annuities are usually more expensive than conventional lifetime annuities and you could end up receiving comparatively less income as a result.
Lump sum withdrawal
This term is used widely in relation to pensions and refers to a single withdrawal of money as opposed to a series of withdrawals.
Following the 2015 pension freedoms, you can now withdraw your entire defined contribution pension pot and take it out as a lump sum.
While the first 25% of your pension pot remains tax-free, it’s important to remember that the remainder will be subject to income tax at the applicable rate.
This is deciding how you wish your estate to be passed on after your death, and includes Will writing, and inheritance tax planning.
A pension is a plan that’s designed to help you save for your retirement. There are two main types of pensions: a defined contribution pension scheme and a defined benefit pension scheme.
Each time you save into a pension you can get tax relief from the government, although there are limits on how much you can contribute and receive tax relief on. Your employer can also make payments to your pension to help you build up your pot. Employers are gradually being required to ensure that their workforce is enrolled into a pension plan, if they don’t already offer one. This is called ‘auto-enrolment.
This is paid by the government and everyone is entitled to it once they reach State Pension age – providing they’ve paid, or have been credited, with National Insurance (NI) contributions. From 6 April 2016, you need a minimum of 10 years NI contributions to receive the lowest level of the flat rate State Pension.
The maximum basic flat rate State Pension is currently £155.65 per week, but the amount you receive will depend on the level of NI contributions you’ve made.
The current State Pension age is 65 for men born before 6 December 1953, and between 60 and 65 for women born after 5 April 1950 and before 6 December 1953. However, it will increase to 66 for both men and women between November 2018 and October 2020. Click here to find out your state pension age.