Footpath Financial Limited is a firm of Independent Financial Advisers who are authorised to advise on and arrange annuities and drawdown contracts. Based in Farnham and Crowthorne we serve the Guildford, Hindhead, Alton, Farnborough and Basingstoke areas.
Annuities and Drawdown
When you buy an annuity, you are effectively swapping some of the capital in your pension fund for an income; usually an income for the remainder of your life.
You can elect to use all of your pension fund, or you can take your tax free lump sum entitlement of 25% and buy an annuity with the remainder. You can buy an annuity that will pay you an income for the rest of your life, called a Lifetime Annuity or you can buy an annuity with a proportion of your pension fund that will pay you an income for a specific period, say 5 years.
The older you are when you buy an annuity the more income you will receive from it for a given investment, reflecting your reduced life expectancy as you get older. In addition, if you are in a poor state of health, you may well be able to buy an impaired life annuity, which will pay you a higher than standard income.
The annuity payment to you is divided for tax purposes into a "return of capital" and investment income. Only the income part is taxed at the usual tax rates. As you get older most of your income from the annuity will be tax free.
Advantages
If you buy a Lifetime Annuity you cannot outlive your capital, the Life Company will continue to pay you until you die. Your monthly income is also guaranteed by the Life Company you bought it from: UK authorised life companies are covered by a 90% compensation scheme.
Because the risk to the Life Company is pooled among all of their annuity customers; the Life Company's other customers will subsidise your retirement if you live longer than average
Disadvantages
If you buy a single life annuity, then your annuity fund will die with you. You can buy a joint life annuity that will continue to pay your spouse in the event of your death, usually at either 50% or 66% of the amount you receive. This type of annuity will pay out less income per year overall than a single life annuity, to reflect the likelihood that the Life company will be paying an income for a longer period.
Help with choosing Choosing the right annuity for your needs is actually quite a complex decision. Even if a straightforward single life annuity is your best bet, then it is still worth checking that the annuity rate you are being offered by your pension provider is competitive. Annuity rates do do vary a lot from one provider to another and unlike most investment related purchases you cannot change your mind once you go ahead with the purchase.
Buying an annuity is not your only option.
You may be better off not choosing an annuity at all. You might want to consider drawing down your income directly from your pension fund instead.
Please contact us if you are in any doubt, we are happy to work through your options with you and then help you get the best possible annuity deal from the whole of the market. We can also advise you on the various so called "third way" annuity options available.
Drawdown explained
Instead of buying an annuity at retirement you can elect to leave your fund invested, and draw down your retirement income directly from the fund, as and when you need it.
Advantages
The balance of the fund left invested should continue to grow into your retirement. You can elect not to drawdown any income in any year if you don't need the money. You can also vary the amount of money you draw from the fund according to your needs, within specified limits. This is more flexible that an annuity and can be useful for tax planning.
If you have money remaining within the fund when you die you don't loose it all like you would with a single life annuity. Instead you can transfer the whole fund to someone else in the form of a pension for them, or leave a lump sum to someone else, subject to a 35% tax charge.
You can vary the income you drawdown to manage the amount of tax you pay. If income from other sources, like the surrender of an investment bond, is going to take you into a higher rate band, you can at your discretion elect to draw less or no income.
Because you are able to buy an annuity at any time with your drawdown fund, you can wait and potentially take advantage of annuity rates if you think they are going to improve in the future
Disadvantages
The charges for administering a drawdown fund can be higher than buying an annuity.
If you live longer than average you may have been better off with an annuity, insofar as annuities are designed to pay out a set amount of income per year for the average persons life expectancy.
In addition, your fund remains at risk for as long as it is invested, though this risk can be mitigated depending on your choice of fund.
How much can I drawdown? You can drawdown between 0 and 120% of the Government's so called GAD rate. In simple terms, the GAD rate is the amount of money that the Government thinks you would have got per year, had you decided to buy an annuity instead.
