Pictured above: Kevin M Jenkins
With interest rates being at an all time low, it may appear that
retiring in 2011 means locking yourself into a low annual income
for the rest of your life. But is this really the case?
The vast majority of people purchase a standard annuity to
convert their pension savings into retirement income.
However, depending on the size of a person's pension pot,
their attitude towards risk and whether they can afford to defer
their retirement income until later, a standard annuity may not be
the best option in 2011.
Kevin M Jenkins, a Staffordshire based independent financial
adviser with Key Financial Management commented: "If a standard
annuity is purchased directly from the company which holds the
pension, then this may not be the best option as an informed and
considered decision will not have been made as people need to 'shop
around' to find best product and rate for their needs."
Other options available to a person planning to retire in 2011
may include deferring the purchase of a standard annuity, taking
income drawdown or buying a variable annuity.
Commenting on this Mr Jenkins said: "Option one is viable for
people who can afford to defer income and that rates rise
significantly to also cover the income which will have been
deferred. Income drawdown allows a person to take an annual income
whilst retaining the pot, but is mainly suited to people with large
pension savings who can afford to take a risk on their future
income and the costs incurred. The third option works in the same
way as a standard annuity but with the added advantage that the
income is not fixed, and that it has a guaranteed minimum, which
can rise or fall depending on the performance of the investments
purchased. A variable annuity also has the flexibility to be
converted to a standard annuity at anytime meaning that a person
can take advantage of better rates in future. Two important aspects
to consider are that the guaranteed income is usually lower than
that of a standard annuity and the administration charges are
normally higher."
With regards to annuities, there are a number of options
available in how to receive the money invested. A person can opt to
guarantee that the income will be paid out even if they die, or
that part of the investment is paid to a spouse on death.
There is also an enhanced annuity which specialist providers
are able to offer better rates to people who may have medical
conditions or fall into their criteria that qualifies for an
enhanced annuity.
No matter which option a person chooses they are entitled to
take up to 25% of the accumulated fund as a one-off tax free lump
sum and that once they start receiving their pension it is treated
as income and is taxed as such.
Mr Jenkins concluded: "The best course of action for anyone
looking to retire in 2011 is to 'shop around' and take professional
advice on what products are available from the whole of the market.
This is the best way to ensure that a well informed decision
can be made."