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Converting Pension Funds into Annuities From:

Abbey Life
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Legal and General
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Annuities From?...

Possible Pension Annuity Providers:

AXA Sun Life
British Life
Canada Life
Clerical Medical
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GE Life
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Legal & General
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and many others

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What is a pension annuity?

An annuity is an arrangement where you make a lump-sum investment and from this investment you will receive a guaranteed level of income for your retirement. Most annuities are bought using pension funds held in money purchase pension schemes.

To reiterate, an annuity converts a savings fund into income and that income will be paid to you for the remainder of your life.

Although an annuity is payable for your lifetime after purchase, it is possible to select a fixed period if purchasing an annuity with cash as opposed to pension funds.

Examples of this type of annuity are conventional annuities, with profit annuities and unit linked, or 3rd way annuities. Annuities which are purchased from your savings, i.e. not from a pension scheme, are referred to as "Purchase Life Annuities" or "Immediate Vesting Annuities".

You can buy an annuity if you have one of the following pension types:

 1. A Personal Pension
 2. A Stakeholder Pension
 3. Retirement Annuity Contract (RAC)
 3. Free Standing Additional Voluntary Contribution Schemes (FSAVCs)
 5. Most Additional Voluntary Contribution Schemes (AVCs)
 6. Occupational Money Purchase Schemes
 7. Section 32 Policy (Buyout Bond)

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Types of Annuity

A wide range of options can be selected when choosing an annuity plan. The most widely used options are as follows:

Minimum Term

Annuity income is guaranteed to be paid until the annuitant (annuity holder) dies, but it can also be modified to include any of the following options:

• 5 year guarantee - The annuity ceases at death of annuity holder, or after 5 years, whichever is longer

• 10 year guarantee - The annuity ceases at death of annuity holder, or after 10 years, whichever is longer

• Joint life annuity - The annuity ceases on the death of the 2nd of two named annuity holders

Spouse Benefits

Your spouse, partner or dependants can be protected after you die by choosing one of the following:

• Reduction to half benefit,
• reduction to two thirds benefit or
• full benefit

The annuity is adjusted to the new level at the death of the annuitant or, if selected, at the end of the guarantee period. It continues until the death of the spouse, partner or dependants.

Annuity Escalation

An annuity can either be paid at a fixed level or can include an escalation at 3 percent, 5 percent, or at the RPI percentage (the annual increase in the retail price index). You can thus choose to compensate for any inflationary effects inflicted on your income. However, bear in mind that your initial income level will be reduced if you choose escalation.

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The Open Market Option

The Open Market Option allows retirees to shop around for different ways to convert their pension funds into an annuity. They don't have to just accept the rate offered by their pension provider.

When a pension fund reaches maturity, pension providers advise their customers of the fund value and give general information about annuities and the expected level of annuity income.

They are then entitled to use their Open Market Option which allows them to transfer the pension fund value to another annuity provider of their choosing. This enables them to take advantage of a higher annuity income which may be available from a different provider. Annuities are usually provided by life insurance companies.

Enhanced Annuities / Impaired Annuities

If you are in advanced years, a smoker or are in/have been in poor health, you may be able to increase your retirement income.

The reason why some annuities, called "Enhanced Annuities" or "Impaired Annuities", pay more than basic annuities is because those that are in better health tend to live longer than the average. The annuity providers therefore have to pay out more over the healthier people's retirement lifetime so the yearly income is usually lower. This is why it's very important to report any medical condition, no matter how small you think it is, to your specialist. It may result in a higher rate of return.

You may regard yourself to be relatively fit and therefore not be eligible for an enhanced annuity, but the reality is often different. Some think they have to suffer from a serious medical condition such as cancer, heart disease or stroke to receive extra income in retirement - this is not always the case. A seemingly minor condition or complaint may significantly increase your annual retirement income.

In fact, if you've one of nearly 1500 health conditions, such as a digestive complaint, being overweight, high cholesterol, asthma, high blood pressure, diabetes, heart problems etc., you must ensure you mention it to your annuity specialist.

Additionally, higher incomes are often achieved by:

• Smokers of 10 or more manufactured cigarettes per day
• Those who have retired from certain occupations, especially blue collar workers
• Those who live in certain areas of the country

It's thought that up to 40 percent of the UK's population could increase their annuity income with an enhanced annuity. If you believe that you fit that category, it's very important that you tell our team of annuity specialists about it. You will stand a much improved chance of a higher income for the rest of your life.

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Annuities for Smokers

If you smoke, pension annuity providers factor in that you are likely to die sooner than the average person that doesn't smoke. Therefore they assume that they will not be paying you your income for as long a period. A presumed shorter lifespan means that being a smoker can boost the amount of income you will receive from your annuity.

So, as a smoker, you may already be eligible to receive a higher annuity income, but also, dependent on your age, you may receive further enhanced rates of up to 30 percent above the standard level annuity rates.

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Income Drawdown/Pension Release

As an alternative to an immediate annuity purchase, you can choose to release your pension funds using income drawdown .

Income drawdown lets you control your own income instead of getting a regular, set sum from an annuity provider.

You are able to access your full retirement savings and invest and withdraw money as you wish, instead of being tied to an annuity.

With income drawdown you also retain ownership of your pension fund and can therefore pass remaining funds on when you die.

Using income drawdown as a first option can give you time to make a final decision on how to fund your retirement - for instance you might eventually choose to purchase an annuity at a later date.

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Why We Don't Show Annuity Rates: The Argument Against Annuity Rate Tables and Calculators

You may have already visited other annuity websites and used an annuity rates calculator or consulted an annuity table.

• Were you sure that the rates were up to date?

• Did you know that annuity brokers may have access to a broader range of retirement income possibilities?

• Did the calculator or table take into account all the annuity products on the market or was it just a selection?

• Did the site promote particular annuity providers over others as they were paid higher commissions by certain companies?

• Are annuity companies able to pay to list their particular products higher in the tables, or even have their products shown in a different, perhaps more prominent way?

• Was it an individual quotation or just an illustration?

• Were you aware that the annuity rates may change before your application goes through or, if you received a quote, was it guaranteed?

Updated By Machines Or Humans?

Did those sites use 'screen-scraping' technology that retrieves and transfers information from other programmes to collect the rates?

According to Wikipedia, "Screen scraping is generally considered an ad-hoc, inelegant technique, often used only as a "last resort" when no other mechanism is available. Aside from the higher programming and processing overhead, output displays intended for human consumption often change structure frequently. Humans can cope with this easily, but computer programs will often crash or produce incorrect results."

But What If The Site Tells You That Its Rates Are Up To Date?

Even if the annuity tables or rates calculators were 100% up to date and correct, were you aware that the resultant figures may have no resemblance to the income that you will actually achieve? This is because your annuity may increase due to circumstances as yet unknown to the website, for instance your state of health, medication you may be taking and whether you smoke or not. Some annuity providers even base your future income on your previous occupation, especially in the case of manual workers, or where you live.

So, let's say that you do eventually find a website where everything is up to date and works correctly; do you know at this stage whether you want a level, fixed-rate escalating or an rpi-linked escalating annuity? Also, have you considered your spouse, partner or dependant's percentage on your demise? Or have you thought about an unsecured pension? There are a baffling array of retirement income choices.

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Why Use An Annuity Broker?

1. A broker may be able to secure better annuity deals than you may be able to.

2. They're more likely to have access to a wider range of annuity and alternatives to annuities than you are.

3. Due to their ongoing relationships with annuity providers, they may be in a better position than you to surmount any problems that may arise with your application.

4. You will have a qualified, expert point of contact should anything go wrong or need attention.

5. They work to a set of guidelines laid down by the Financial Conduct Authority (FCA). The FCA are the UK's financial regulator.

6. Annuity brokers have got an interest in recommending the right product for your circumstances as they will not wish to fall foul of strict Financial Conduct Authority (FCA) regulations.

7. If you choose not to get Financial Conduct Authority (FCA) registered broker advice, you may not be able to get compensation through the Financial Services Compensation Scheme if, at a later date, you have a complaint about the product that has been recommended.

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