Annuities
An Annuity provides you with a guaranteed income in return for a capital sum.
There are three different ways of providing a pension income: Secured Pension, Unsecured Pension and Alternatively Secured Pension.
Secured Pension
A Secured Pension is a promise from a pension scheme (i.e. a defined benefit scheme, or a scheme pension from a money purchase scheme), an annuity bought from an insurance company or an alternative secured pension (only available from age 75). A Secured Pension is purchased by using money from a pension fund. All the income generated is taxable, subject to each individual's personal allowance. Investors have the option of exercising their 'Open Market Option' which allows pension funds to be transferred to a company offering a higher Annuity rate.
Unsecured Pension
An Unsecured Pension is similar to the old Drawdown Contact which allowed the individual to draw a tax-free cash sum from their pension and a set level of income (using GAD tables), whilst the fund remains invested. However, under the Unsecured Pension the minimum and maximum income levels have changed. The minimum income is zero and the maximum income is 120% (using GAD tables). Income limits are reveiwed every 5 years. The tax-free cash sum (also known as the pension commencement lump sum) must be paid when funds move into an Unsecured Pension. Unsecured Pensions cannot continue after the age of 75 and must then be vested.
Alternatively Secured Pension (ASP)
An Alternatively Secured Pension is similar to the Drawdown Contract, but is only available from the age of 75. There is no minimum annual income required and the maximum income is 70% (using GAD tables). Income levels are reviewed every year. On death the remaining fund would first have to be used to pay dependent's pensions. On death in ASP, there could be an increase in the deceased's estate resulting in a potential inheritance tax (IHT) charge.
There are many different choices within an Annuity and it is prudent to take indepedent financial advice.