Flexible Annuities

The annuity market is continually evolving and different annuity providers continue to develop new products to satisfy customers’ requirements. Some of these new flexible annuities can be quite complex to understand. They are designed to avoid some of the risks associated with Unsecured Pension (income drawdown) whilst trying to offer flexibility and the opportunity for some capital growth, that conventional guaranteed annuities can’t offer. The choice of flexible annuity plans is considerable and new products are constantly evolving. Below are just three examples of the different types of flexible annuities that are currently available.

(1) Short Term Annuity (Rolling 5 year annuity)

This is a retirement option for those with larger pension funds. With this option, after drawing your PCLS (tax free cash), the bulk of the pension fund remains invested, but a portion of the fund is used to buy a temporary annuity which lasts 5 years. The plan is reviewed every 5 years. Each time you purchase a temporary annuity you can select which additional benefits you want to include. This makes it somewhat more flexible than a conventional annuity. Any escalation in the annuity or payment on death will be determined by your choice at outset.

Please note that with this option there are investment risks involved and the plan needs constant monitoring to achieve success. You must commence an Alternatively Secured Pension (ASP) or purchase a lifetime annuity by the time you reach age 75.

(2) Flexible Annuity

This option is only available for larger pension funds (£100k plus) and allows the retiree to take varying amounts of income (between limits). Another feature of this option is that the retiree can exercise some investment control on the fund, either through a choice of risk graded strategies or a selection of unit linked funds up to age 90 at which point you have to convert your investments to a conventional annuity.

Early death cross subsidy is distributed using bonuses to age 90. This option carries an investment risk but also provides the potential to protect your income from inflation.

(3) Flexible Lifetime Annuity

Pays an income for life, but is designed to give greater investment control of your pension fund, offering a more flexible way of taking retirement income and providing benefits for your dependants if you so wish. The value of your investment may go down as well as up.

It is intended for people with larger pension funds of £100,000 or more and with significant other financial resources, who may be willing to take a higher degree of risk with their retirement income.

These are complex products and, in our view, you should only consider purchasing a flexible annuity if you have received appropriate advice from a qualified independent financial adviser and fully understand the risks involved.

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