With many more options available now to provide you with income in retirement it really is important that you get proper independent financial advice to help you choose wisely the best product suited to you.
One product which has been around for some time and is maybe just now getting due prominence is the Flexible Annuity – and it’s certainly worth considering it as you begin your retirement planning.
The definition of a Flexible Annuity is really quite straightforward:
- It is an annuity and not an Unsecured Pension (sometimes also known as drawdown), so it falls under annuity regulation.
- It is flexible, which means that your income can be set and varied between a minimum and maximum level income limit, generally at a timing to suit you.
So Why Use a Flexible Annuity?
This retirement product is sometimes misunderstood. This is because it can appear very similar to an Unsecured Pension contract in that the standard model allows you to stay invested. Critically however, these Flexible Annuity contracts are subject to annuity rules. Which means:-
- There is no need to take a conventional annuity by age 75 because you are already in an annuity.
- The income levels are not based on GAD (Government Actuarial Department) rates, but by prevailing annuity rates.
- A minimum level of income must be taken, equivalent to 50% of the annuity rate at that time
- A maximum income can be taken which is equivalent to 120% of the prevailing annuity rate.
- You can take income between minimum and maximum levels as you choose like with an Unsecured Pension.
- There is no lump sum death benefit, however the contract can be guaranteed for up to ten years.
- There is usually no need to ever purchase a conventional lifetime annuity (Prudential appear to still insist on clients doing this by age 90 though).
As well as choosing an income between minimum and maximum levels you also have the option to vary income each month although it would obviously be more practical to do this on an annual basis.
Ad hoc payments from the annuity fund are also allowed. This offers you greater flexibility. For example you could withdraw your holiday fund each year as an ad hoc amount. For many however, simply having peace of mind that you could draw upon a reserve cash boost whenever needed is also a great comfort.
Some companies (such as Lincoln) also provide a guarantee which underpins the minimum income level at a certain level as long as you are prepared to pay the premium for the guarantee.
Flexible Annuity v Unsecured Pension – so which is best?
So what advantage if any does the Flexible Annuity give you over an Unsecured Pension, particularly when the Unsecured Pension seems to offer greater income flexibility plus the advantage of a lump sum benefit?
I think the answer lies in the original concept of a Flexible Annuity.
Remember, it is designed for a lifetime and not a fixed or limited term. The concept is to utilise the fund to provide an income for the rest of your life. This is important because an Unsecured Pension is designed to retain the annuity purchasing power of the fund i.e. to ensure that there is enough in your fund to purchase an annuity at least equal to that which could have been purchased when you started. The difference is that the Flexible Annuity simply aims to retain the ability of the fund to provide an income for your whole life.
In Conclusion
A Flexible Annuity does offer some significant advantages when doing your retirement planning.
As a retiree you can create a highly tax efficient income for even average sized funds for yourself. Add mortality credit, investment opportunity, minimum guaranteed incomes and death benefits to the mix and you have a solid option to consider.
As ever though it’s important that you speak to a professional adviser who asks the right questions before making any recommendations about how you take your income in retirement. Your own personal requirements and circumstances will always be unique. I’m only a phone call away!
Until next, take good care…
