If your about to retire you will no doubt be thinking about income planning for the years ahead. If your not one of those with a lucrative final salary pension then you will have a number of different options available to you. One of these will be to buy an annuity which is what the majority of seniors do in order to fund their retirement. Annuities are popular because they ensure that income is paid for the lifetime of your retirement, regardless of how many years that turns out to be. Recently however the rates that insurance companies have been offering for annuities have fallen, making many seniors think about what other choices they have aside from an annuity purchase. Here we discuss some of the alternatives.
Under drawdown your pension fund stays invested, usually in equities as opposed to bonds, and you take an income from it each year. The maximum amount you can take out is capped by the GAD rate, which is set by HMRC. Drawdown plan are often taken by seniors who have a large amount saved in their pensions fund. They are riskier than pension annuities as the level of income you receive can potentially fall if your investments do not perform well. Although you can set a minimum income guarantee, you will have to accept that your income may not always increase. Consider also that even if you are getting the same level of income each year, because of the impact of inflation your spending power is still going down even if the amount of money you get stays the same.
Fixed Term Annuities
If you buy a fixed term annuity you only have to commit a part of your retirement fund as opposed to all of it as is the case with buying a life annuity. However you are still able to draw an income which is fixed for a set number of years. When this period comes to an end, you can then assess if you want to buy a lifetime annuity or other product depending on your circumstances. Fixed annuities do offer flexibility but you should be aware that lifetime annuity rates could fall behind where they were when you made your fixed term annuity purchase.
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