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How will new pension annuity rules affect you?

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Pension rules and regulations can be notoriously complex, especially where annuity is concerned. There have been important changes made to annuity rules recently, so it’s vital that you understand exactly what these are and how they might affect you. It doesn’t matter how close you are to retirement, you still need to know what money you’ll have available once you finish work.

What is an annuity?

When you reach retirement, you can use your pension fund to buy an annuity. This will then give you a fixed amount of money annually for the rest of your life. Annuities are generally bought through insurance companies. They use a number of factors to estimate how long you’re expected to live and then take this information to determine how much they should pay you each year. An annuity is a one off purchase and once you’ve made your decision you can’t change it. This means that you need to consider your choices carefully and understand exactly what you’ll be receiving before you make a commitment. This has been made even more complicated as the rules regarding annuities have changed, which will see some people receive more and others less.

The changes explained

Previously, an annuity must have been bought before you reached the age of 75. However, this is no longer the case and you can choose yourself when is the right time to take out an annuity. When you buy an annuity, you can opt to take out up to 25% tax free as a lump sum. This no longer needs to be taken before 75 either.annuity pensions

One of the major changes to annuities is that those with a large pension don’t have to buy one at all if they choose not to. This rule applies to those who can expect a minimum annual retirement income of £20,000. This income can be made up of the state pension, any final salary occupational pension and an existing annuity. However, you can’t include savings, investments or money from property in your calculations. This enables you to use your pension pot as you want and take out more or less money each year as required.

Gender equality

There have also been implications to annuities because of gender equality rulings by the European Courts. Insurance companies can no longer differentiate between men and women when they’re calculating how long a person will live. As women statistically live longer than man, this could be a beneficial ruling for them, as they are likely to receive an increased annual income as a result.

Death benefits

Death benefits can be built into an annuity, providing an additional income for your partner if you were to die earlier than expected. These can now be taken as a lump sum even if the policy holder dies after the age of 75. However, the tax that is payable on this amount will rise to 55% from 35%.

Annuities are still one of the most beneficial ways of funding retirement for the majority of the population. They offer a fixed annual income, so you’ll know exactly how much you’ll be receiving and can plan for the future. It’s important to shop around before buying an annuity, to ensure you get the best possible deal.

 

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About Catherine Stern

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About Catherine Stern

Catherine Stern is a freelance writer with a background in marketing and PR. She currently writes web content on a range of subjects, from finance and business to travel and home improvements. As a working single mum of two young boys she understands the pressures that today’s working parents face and the topics they want to read about.

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