Throughout your working life you save hard to provide for your income needs in retirement, so as the day approaches you have many choices to consider. Will you chose to annuitise or go for the income drawdown route? Even if you choose to go for an annuity you need to consider all the variations that are available.
A standard compulsory purchase annuity (or Lifetime Annuity) is purchased after any tax free cash has been taken and is then offering a guaranteed income for life. The terms offered at the start may be based on you being fit and well when you first enter retirement and would therefore be based on your normal life expectancy. The danger is that you could be annuitising too soon.
An alternative that should be considered is the Fixed Term Annuity which as the title suggests is a temporary measure for providing an annuity income. These schemes provide you with the guaranteed level of income you may require but for a specified period of time. In addition to the guaranteed income they will also guarantee a maturity value which is known as the Guaranteed Maturity Value (GMA). At the maturity date you are then free to take out another Fixed Term Annuity or consider moving into Income Drawdown, Conventional Lifetime Annuity or Investment Linked Annuity.
Choosing a Fixed Term Annuity will give you added flexibility as you are making a decision for your income for a specified term rather than one that will last your lifetime. You can also choose this type of plan to access your Pension Commencement Lump Sum (tax free cash) and take no income for the duration of the fixed term. You will then receive a guaranteed return at maturity.
By deferring your annuity purchase you may find that later in life you health has deteriorated and you could at that point secure benefits under an enhanced annuity therefore giving you the potential for your income in retirement.
You can include various options within the Fixed Term Annuity Plan to offer your loved ones some protection. You can set up the payments so that they continue to pay to a spouse, civil partner or financially dependent partner should you die during the fixed term. You could also structure these plans to ensure that the income will be paid for a specific number of years from inception even if you should die during this term this is known as a guarantee period.
In a similar way to Income Drawdown Fixed Term Annuities must be reviewed every three years for those aged under 75 and annually for those aged over 75. Even if the term of the plan is over three years a review of the maximum income level is still required. Income levels may need to be reduced should the government lower the GAD rate.