Nearly 40% of people retiring with defined contribution pension schemes are unaware of their right to shop around for a pension annuity, according to new research just published by the Association of British Insurers (ABI).
Defined contribution pension schemes are those into which an employer pays a regular contribution, fixed as an amount or percentage of the employee member’s pay.
Under pensions law, the ‘Open Market Option’ enshrines the employee’s right to look at all pension annuities available on the market, as part of his retirement planning. The ABI survey revealed that of those surveyed, only 62% of people had been aware of this.
Your pension fund manager should provide you with an estimate of what your pension fund is worth, six months before you are due to retire. Shopping around for the right pension annuity for your retirement is not only advisable but crucial, given that once your choice is made, there is no going back. You are required to stay with your chosen annuity product for life.
What type of annuity?
There are many annuity providers on the market, and there is no requirement to buy your annuity from the company that managed your pension fund. There are also many types of pension annuity available.
The first choice to make is to identify who should benefit from your pension. A single life pension annuity pays out only to you, and ceases when you die. However there is also the joint life annuity, which will continue to pay your spouse after your death, until they die, or can also pay your children, for an agreed term.
The with-profits pensions annuity continues to invest your pension in funds, and as such can achieve a higher income for you year upon year – although your income also has the potential to fall, depending on how those investments perform. However, some with-profits annuities have a guaranteed minimum payment built-in.
A flexible annuity also invests your pension in funds, and links your income to the performance of those funds. The very popular ‘flexible’ option refers to the fact that you can, within limits, vary the amount of income you take, from month to month.
An enhanced pension annuity offers a higher regular income to those with health problems, based on the assumption that they will not be drawing their pension for as long as a person in full health.
But using the lump sum from your pension fund is not the only way to purchase an annuity. If you have savings or funds that are not invested in a pension fund, they can be used to purchase an immediate life annuity, which effectively turns your savings into a regular lifetime income.
The ABI consumer research surveyed over 2,000 defined contribution pension customers in May and June 2009.
