Turning your pension
savings into an income

Give yourself plenty of time to think through the options

Turning your pension savings into an income for the rest of your life is one of the most important financial acts you will ever make. Choosing the right deal may determine your income for perhaps the next thirty or more years, and possibly the wealth of your spouse after you die.

There is usually only one chance to get it right and, with recent falls in stock markets, maximising income has become even more important. Retirement should come as no surprise, but too many people leave it far too close to the date they finish work to start detailed financial planning.

If you have a personal pension or a company pension, other than a final salary scheme, you will eventually need to consider how and when you convert the fund built up into an income in retirement. Ideally, you should give yourself plenty of time and start thinking through your options some five years prior to your retirement.

If you currently find yourself in this situation, we can help guide you through the minefield of choices you will have to make. It’s also important to remember that it is not a requirement that you have to take the annuity offered by the company you previously saved your pension with.

The open market option provides you with the facility to shop around for a better deal. Depending on your circumstances, this could buy you a significantly higher income. In addition, advances in the way annuities are priced mean that you could qualify for a higher rate because of previous poor health, your occupation or where you live.

If you use your pension to buy a level annuity, you will receive an income fixed for life. Level annuities give you the biggest income from day one, but do not allow for inflation. An alternative is an escalating annuity that pays a growing annual income. The growth in your future income can be linked directly to the Retail Prices Index or it can be by a set sum annually.

Did you know?
Annuities are linked to average life expectancy, with those likely to live the longest receiving a smaller income per pound of their pension fund. But insurers are becoming more sophisticated about the way they do their sums.

Rather than simply giving average rates based on age and sex, insurers are turning to more individual pricing. Rates can be linked to occupation, health or even postcode.

Even higher rates may be available for those who have had health problems such as diabetes or high blood pressure.

Enhanced annuity rates can offer significantly more income because a person’s life span is expected to be correspondingly shorter.

The value of investments and the income from them can go down as well as up and you may not get back your original investment. Past performance is not a guide to future performance. Thresholds, percentage rates and tax legislation may change in subsequent finance acts.