Pensions annuities come in various types designed to suit many individual preferences, and life situations.

You can opt for an annuity that pays beyond the end of your lifetime to your family, or one which doesn’t pay at all – for the moment - paying later instead, to suit those ’retiring gradually’ by continuing with part-time work.

Here we look at the main types of pensions annuities.

Guaranteed annuities will pay out to your spouse after you die, for a set term, or until they too pass away.

If you have savings, investments or an alternative income when you retire, it may suit you to put off taking your pension – talk to us about deferred annuities.

When buying an annuity, imperfect health can be an advantage, in financial terms. For smokers, or those with certain mild health conditions, there are enhanced annuities, while those with more serious illnesses may be eligible for  impaired life annuities. If you qualify for either of these special product types, you may well be able to add up to £100 per month to your retirement income.

Perhaps you may wish to look at variable rate annuities, that will invest your fund in the stock market, with the potential for high growth in your savings, and a higher pension income, in a good year. In that case, with-profits annuities or unit-linked annuities might suit you.

For further information on all these pensions annuities, make an online annuity enquiry or ring our annuities team on 0800 678 5929 now.

Enhanced annuities often provide a higher pension income from the pension savings of those whose lifestyle choices or medical history make it likely that they will not live as long as healthier annuities purchasers. Enhanced annuities are structured to provide a higher payout, as it is likely that they will not have to pay for as long, based on the reduced life expectancy of the annuitant.

Enhanced annuities are particularly associated with smokers, and those with high blood pressure or high cholesterol. This type of pensions annuity is usually allocated on the basis of a points system, with no medical examination required. However, with some companies the points system means that enhanced annuities are more usually offered to those with 2 or more of the conditions mentioned above.

Annuities provider Towers Watson noted sales of enhanced annuities totalling £582m in the first quarter of 201o, a new quarterly record which was then smashed by even better record sales of £676m in the second quarter.

Towers Watson also indicated that enhanced annuities, which were introduced in 1995, now account for a third of all annuities sold in the UK.

Many of those buying pensions annuities to turn their pension savings into a regular income could have increased their pensions income for life by up to 20%. Pensioners in less than perfect health, who would be eligible to buy an enhanced annuity, could be missing out on as much as 30% of their potential pension income, by not seeking advice.

Specialist pensions law firm Sackers has pointed out that anyone who was not made aware of their right to shop around for their pension annuity – which is known as their ‘open market option’ (OMO) – could now be eligible to make a legal claim for compensation from pensions providers or the trustees of pension schemes.

There is an obligation on pension companies to inform customers of their open market option, as they approach retirement age. However, a report by the Financial Services Authority found that nearly 40% of pensions providers fail to make it clear enough to customers of their right to shop around. As a result, many of those retiring take the first pensions annuity offered to them, which can be an inferior annuity from their pensions provider.

A spokesman for Sackers said that while pension scheme trustees are not obliged to offer members financial advice themselves, they should advise members to get independent, unbiased financial advice elsewhere. Where they do not, and the member suffers a loss of pensions income as a result, there could be a case to answer, the company said.

This week the Government has outlined plans to scrap the legal obligation which makes purchasing an annuity compulsory for pensions savers.

For most pensioners, purchasing an annuity is likely to remain the most cost-effective option of choice, but pensions savers will benefit from greater freedom to choose the timing of the purchase. 

Previously, some pensioners approaching their 75th birthday had been forced to purchase their pensions annuity when rates were low. They will now have freedom of timing their annuities purchase, and waiting for markets to recover, giving them a better annuities deal and a higher pensions income.

Options other than buying an annuity are likely to be attractive only for those with very large pension pots, who do not have to worry that they will run out of capital before the end of their life. For the average pensions saver, whose pensions pot will be £30,000 or less, more expensive options, such as income drawdown, are unlikely to attract.

Income drawdown is a means of leaving your pension savings invested in the stock markets, and living off the income or dipping into your capital to fund your lifestyle. The advantage is that you remain owner of your pension pot and can pass it on to your loved ones; however, there are hefty fees involved.

The government proposals on income drawdown may also cap the amount of pension income that can be taken each year, unless you can prove that you have enough saved never to be dependent on the state.

For the vast majority of pensioners, however, purchasing an annuity will always be the best way of securing a guaranteed income in retirement.

With a national deficit of £155bn and only £6.2bn of savings already clearly earmarked in the budget proposals – what can you expect, when the chips go down on Tuesday 22nd June?

Here is our roundup of budget changes already announced, of budget proposals that appear likely, and of other possible government budget cuts to come.

Pensions: removing compulsory annuitisation, gradually increasing the current retirement age, improving occupational pension schemes and restoring the link between state pensions and earnings.

Government has quoted figures from the Office for Budget Responsibility to show that the costs of expensive public sector final salary pensions schemes, such as those in the civil service and other public bodies, will more than double to £9bn by 2015. Calling these ‘unreformed gold plated’ pension schemes ’unfair’ and ‘not affordable’, a review has been promised as a matter of priority.

Government may be planning budget changes to scrap compulsory annuitisation, removing the legal requirement to buy an annuity with your pension savings by age 75.  This will give those with large pension pots of £100,000 or more the option to hold on to their money, perhaps leaving it invested in the stock markets in an ‘income drawdown’ arrangement, rather than hand it over to an insurer. Realistically these budget changes will make little difference to the average punter, whose pension pot of £50,000 or less is still most likely best used to purchase a lifetime income through an annuity.

Basic State Pension – restoring the link to earnings will help ensure that the Basic State Pension will increase ahead of inflation, and in line with the national average wage. The state pension is guaranteed to increase in 2011 in line with prices, earnings or 2.5%, whichever is the higher.

Pensions Tax Relief: those paying tax at 40% or 50% on parts of their income can currently regain that as tax relief on pensions contributions. If you pay tax at 40% and invest a £6,000 lump sum as pensions savings, you could receive £4,000 in tax relief. A 50% taxpayer investing £5,000 as pension savings could get tax relief of £5,000 (subject to anti-forestalling rules). This may all change with the budget changes on June 22nd, as higher-level tax relief is seen as a primary target for government cuts.

Income Tax: government has pledged budget changes to help lower earners by increasing the personal allowance i.e. the amount you may earn before tax. Currently £6,475, government budget proposals promise an increase to £10,000. However, there is no indication of the timing on this, it could be phased in over several years.

National Insurance: clashes over Labour proposals to hike NI contributions by 1% became one of the bloodiest battlefields for the previous administration. The Tories were extremely opposed to the 1% increase for workers, but may still impose a 1% increase for employers instead, using the increase of the tax-free allowance to £10,000 as a sweetener.

Capital Gains Tax: government budget cuts could raise capital gains tax from the current 18% to 40%, or even more on June 22nd. The annual capital gains tax exemption, meanwhile, could be cut from £10,100 to £2,000. While government is not expected to backdate these changes, it is not expected to delay them either.

Capital Gains Tax applies, not to the overall value of an asset, but to the increase in value of an asset since you acquired it. It applies to the profit you make from selling a second property, whether a buy-to-let or a holiday home, to gains from art or antiques, or to gains made from stocks and shares investments. It even applies to gifts – if you gift your home to your daughter, without a penny changing hands, there is still no escape from CGT, which will be calculated on a valuation of the property.  If you bought  a second home 10 years ago for £50,000 and can sell it now for £150,000, you will be taxed on the difference, i.e. on the profit or gain you have made – in this case £100,000. Last year you would have owed £18,000 in CGT; government budget proposals may now raise Capital Gains Tax from the current 18% to bring it closer to 40%, in which case you could soon face a tax bill of £40,000 on that house sale. This is why so many landlords have been rushing to sell their properties lately, before any such budget changes kick in.

These increases in Capital Gains Tax are primarily intended as government budget cuts to tax the better-off, but could affect many average earners too. Employees who receive shares as part of their company benefits package would be taxed at the new levels, on the gains they make from selling their shares. Government has promised to prevent the capital gains tax increase from hitting the elderly. This may protect those who have purchased a second property as one strand of their retirement planning. It may also protect residents who have been in nursing homes for longer than 3 years, who would otherwise have found that their family home was deemed to be a secondary residence, and subject to Capital Gains Tax, when they came to sell it.

One solution to CGT increases are Enterprise Investment Schemes. EIS schemes allow you to defer CGT by investing your gains for three years or more tax-free. As such, they are a ‘shelter’ from CGT for as long as you are invested in the EIS scheme.

Inheritance Tax: the original budget proposals to raise the IHT threshold to £1m are now gone, it will now remain at £325,000 for a single or £650,000 for a couple. As part of the round of government budget cuts, this may be frozen, to allow inflation to push more people over the threshold.

Venture Capital Trusts (VCTs): VCTs offer tax-incentivised investments in smaller British companies. They currently give a 30% up-front tax relief on investments of £3,000 – £200,000, although shares must be held for 5 years to retain the relief. Government budget changes may increase tax reliefs on VCTs to encourage investment in small industry, and in particular in the green technology sector, which was singled out for support through budget proposals in the coalition manifesto.

Are you interested in more information on how the budget proposals will affect you on 22nd June? Contact us now with a financial advice enquiry or ring 0800 678 5929

Elderly homeowners who move into care homes could face capital gains tax when later selling their home, unless government plans are amended.

Figures from care home research group Lang and Buisson reveal that there are 380,000 care home residents in the UK, of which an estimated 1 in 4, or 155,000, are home owners.

Many of these care home residents would be liable to pay house capital gains tax if they decide to sell their home, as many do to pay the continuing cost of care. They would be liable for capital gains tax on second property, once they have been living in the care home for 3 years, as their home is then deemed by HMRC no longer to be their primary residence. In effect, their home would have the same status as a second home or a buy-to-let property, at that time.

Capital gains tax on second property would apply in this case to homes that increase in value by more than £10,000 during the 3 years the owner is in the care home. Capital gains tax on second property does not apply to the full property value, but to the increase in the value of the property during the 3 years when the elderly person was in care.

Equally, the tax could apply to those who bought a second home on a buy-t0-let basis, as part of their pensions and retirement strategy.

The level of capital gains tax they stand to pay could  be much higher than the current level of 18%,  as the government has already stated it wishes to increase capital gains tax to bring it closer to 40%.

Many elderly people enter care homes with good prospects that they will return to their own home at a later date. They retain their homes for that reason, but in cases where a planned shorter stay in a care home becomes a stay of several years or more for health reasons, the decision to sell their family home to fund the ongoing cost of care can fall beyond the 3-year deadline for the taxman.

There is one ray of hope for older homeowners – government spokespersons have this week stated they have no intention that those moving into retirement will be the target of the new capital gains tax allowance measures.

New data from pensions specialist Aon Consulting showed the number of those retiring and taking their pension in January was up 22 per cent compared with September. 

Aon believes the rise is driven by a rush of people wishing to take their company pensions and personal pensions before the minimum retirement age goes up from 50 to 55 on 6^th April. 

After that date, a person aged 50 would have to wait for 5 years for their tax-free lump sum of 25% of their company pension or personal pension, and use the remainder to purchase a pensions annuity, or set up another income arrangement. 

Other employees who may wish to retire now include those aged under 55 who believe they may be made redundant, and wish to avoid having to wait several years for their pension. 

Annuities may fall by 30%

 Another reason to take your company pension or personal pension now is the possibility that pension annuity rates may fall by 20-30%, due to new European pensions legislation coming in 2012. 

The Brussels initiative ‘Solvency II’ requires pensions and annuity providers to hold back more capital in their reserves, specifically to meet their annuity pay-out liabilities, which is likely to mean reduced payments to annuity holders. 

Consulting a financial adviser to look urgently at purchasing a pensions annuity, before rates undergo this radical fall, is essential. 

Income Drawdown

 Nonetheless, the purchase of an annuity does not become compulsory until the age of 75, and retirees who believe that stock markets are now in recovery from the recent downturn may prefer an unsecured pension, also known as income drawdown, where their pension pot is left invested in the stock markets for longer. This is a more risky strategy than purchasing an annuity right away.

With income drawdown, your income is taxed on a PAYE basis. You can take or ‘draw down’ larger amounts from your pension savings, compared to what you would have had from an annuity payment. You can also choose to take lesser amounts, or none at all from time to time, making income drawdown a good option for those who are continuing to work part-time.

With income drawdown, your pension remains your money, and can be left to your family if you die, whereas if you had bought an annuity your money would become the property of the insurance company.

The downside is that, with income drawdown, you are ‘dipping into’ your pension pot. This means that, if you draw down more than the yield from your investments in any given year, you are eating into the capital in your fund, and depleting your retirement savings.

Click here to make a pension enquiry or call 0800 678 5929

 A lack of understanding of pensions annuities is costing pensioners thousands of pounds, according to a new survey by Aviva.

Lack of understanding leads to uninformed choices by those who do not avail of financial advice as they approach retirement, choices which could have dire financial consequences, the Aviva report shows.

Almost two-thirds of over-65 couples do not take out a joint annuity, even though this option leaves an annuity income for the surviving partner, when the first partner dies. In fact, 54% of consumers over 55 do not understand what a joint life annuity is, according to Aviva.

The vast majority of those surveyed also showed a lack of understanding of how health conditions should impact on their choice of annuity.

Most believed that being obese, a smoker or heavy drinker would reduce your pension income, whereas these conditions actually increase your payout, as they are deemed likely to shorten your life expectancy (and therefore the length of the term of the payout).

Aviva estimates that 40% of people could benefit from taking an impaired or enhanced annuity, which provide a higher monthly income to those with health conditions.

Many retirees also fail to realise that they have the option not to buy an annuity at age 65, and that, by waiting if they can, their eventual annuity income will be higher. The law allows a retiree the option to postpone purchase of an annuity until age 75.

A person aged 62 with a pension pot of £29,600, for example, would realise a monthly income of £151, according to Aviva. By waiting to purchase the annuity for ten years until age 72, that person would increase this monthly income to £199.

Indeed, the basic understanding of what an annuity is and does seems lacking in over-65s, the very group who could benefit from this knowledge.

This group did not understand that purchasing an annuity with their pension savings was one route to providing themselves with a regular income. Only 4% of those in this age group rightly stated that an annuity provides an income in retirement, while the remainder of respondents believed that their income would come directly from their personal pension or company pension.

While backdating of tax claims is automatic for people with children, there is no automatic backdating of tax credit claims for people with no children, who were in work prior to submitting a claim – even though they are entitled to backdate for up to three months, according to the Low Incomes Tax Reform Group (LITRG).

For these claimants, backdating tax is available only if they apply for it – and they are most likely unaware of this fact.

Latest figures show that there were half a million claimants in this category on 1^st April 2009. However, claimants are not made aware of their right to backdate, the LITRG said.

Tax credit law states that a claim ‘shall be treated as made’ (i.e. may be backdated) for up to 93 days before it is received by HMRC. However, no mention of the right to backdate is included in tax credit forms and documentation, says the LITRG.

The tax credit claims form and the accompanying TC600 information notes make no mention of the right to backdate. Neither, says the LITRG, do the Revenue’s tax credit leaflets WTC 1 and the more detailed WTC 2.

“Firstly, it is clear to us that HRMC owe many tax credit claimants a lot of money for backdating payments not made; secondly it is not acceptable to continue with this policy of not telling people of their entitlements,” says the LITRG in its statement.

As of next April, if your salary is over £100,000, then you may wish to consider that you face a gradual loss of your Personal Tax Allowance, which is the portion of your salary the Revenue allows you to earn tax-free.

This happens at a fixed rate. For every £2 of income you have above the £100,000 threshold, you will lose £1 of personal allowance.

Effectively, your personal allowance will have disappeared completely if your salary exceeds £114,000.

In this case, you may wish to opt for a voluntary cut in wages. You can achieve this by making a contribution to your pension scheme. If this lowers your income to the £100,000 level, it is an efficient way to preserve your personal allowance.

Diverting funds into your pension in this way will give you effective tax relief of 60%.

Another option would be to reduce your taxable income by making a contribution to charity.