THE recent Green Paper on pensions revealed that the Government still has no intention of changing the age 75 rule for the compulsory purchase of annuities.
However, the paper does suggest allowing individuals to continue in drawdown past the age of 75 where they are willing to forfeit their remaining fund on death. New forms of annuity are also being proposed to offer greater choice and increased compet
ition.
But any changes resulting from the Green Paper are unlikely to take effect prior to April 2004. In the meantime, the options, at age 75, for healthy annuitants remain between some form of traditional or investment-linked annuity and income drawdown.
Traditional annuities offer the benefit of a guaranteed lifetime income. They can be bought on either a single or a joint life basis with a spouse’s pension payable on death. The annuity can be set up to provide level payments or with payments increasing each year, either at a fixed rate or in line with the retail prices index.
Deciding which is best for you depends on where your priorities lie. If you want to maximise the level of income you receive at the outset then you need a level annuity.
But that also means your future income will be at risk from the effects of inflation. To protect your long-term pension from inflation you need an index-linked annuity, but that means the initial income will be lower.
One option that has been developed by a number of insurance companies is an investment-linked annuity, under which the benefits are not guaranteed but depend on the investment growth of the fund.
There are broadly two types of investment-linked annuities - unit linked or with-profits. Under a with-profits annuity, income rises or falls depending on what level you elect to start and what the insurance company’s bonus rates are thereafter.
You decide your starting level by selecting the bonus rate threshold level between upper and lower limits set by the company. If the bonus rates are higher than the level you selected then your income rises and vice versa.
Unit-linked annuities, meanwhile, operate on a similar basis, but the fluctuations in your income can be much greater simply because the variation in performance is considerably wider for unit-linked funds than with-profits funds. Over the long-term a unit-linked fund can produce better returns, but the unpredictable pattern of income puts most people off this option.
New types of investment linked annuity have been developed which enable greater control over the annuity income.
The choice of investment-linked annuity against a standard annuity depends on your own particular needs and objectives, but neither is suitable where your top priority is to preserve the capital on death for your next of kin.
A recent innovation has been the development of a specialised form of offshore annuity where the underlying capital can be preserved on death, even if this happens after the age of 75.
For maximum flexibility, income drawdown will often be the best solution. This facility allows investors to defer buying an annuity until the age of 75 and has become a popular option with investors who have at least £100,000 in accumulated pension funds.
Under income drawdown you can increase or reduce your pension withdrawals from one year to the next within certain limits.
Equally, many people want more income in the early years of retirement and are willing to accept reduced income in their later years. Some people just want to take out their tax free lump sum before retirement, and this offers them the opportunity to do so without being committed to taking an annuity at the same time.
Steve Patterson is the managing director of Intelligent Pensions, the specialist pensions advisers
