Annuities explained by Finance News Bulletin

Published: 31/10/06

As part of its understanding pensions series, the BBC information website provides an foreword to annuitiesIf you have a money purchase retirement fund scheme, you can use the cash you have saved to buy an annuityThis effectively "unlocks" the cash that you have saved in your pension finance to provide an income in retirementThe amount you get will depends on your age, sex and medical the past - and the current annuity rate

The rate is vital because it determines how much income a person will receive for the rest of their existenceAnnuity providers spend largely in ultra-safe government stock, and the rates of return obtainable from this type of investment is closely linked to the Bank of England bottom interest rateThe Bank of England base rate is at present at a very low level This income the return on government stock is poor and annuity rates on offer to persons retiring now are at the lowest height for a generation

Someone who purchased an annuity 10 years ago - when interest tax were higher - would have got two times as much income than they would todayIn the current low annuity rate type of weather, many people are having to amend their retirement plansWhen retirement age is reached, the pension scheme boss will write outlining the annuity rate that they currently offerHowever, pension system members have the right to shop around for the best pension rate, under an "unlock market" option - and can often get a improved deal by doing so

Members of personal pensions and stakeholder schemes can also normally take up to 25% of their fund tax-freeAlso, if you are a member of a group personal pension or a group stakeholder diagram, you can take up to 25% of your fund tax-freeWhen you take your tax-free lump sum you usually have to buy an pension with the relax of your fundSince 6 April 2006, pension savers have been able to ignore the alternative to buy an annuity altogether

Instead , people can now drawdown an profits direct from their pension fund; leaving their pension money investedHowever, any money left in their retirement fund fund on death could be liable to an Inheritance Tax (IHT) chargepension reform Women 1 Women 2 Pension rights Divorce Work pensions bump sums retirement fund Credit Frozen pensions Shortfalls Overseas pension Small pensions Tax and retirement funds Pension repair Made simpleState retirement fund With-profits Final salary

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