Picking 

the right sort of annuity

The Pensions Act 2004 has made a number of significant changes to the benefits that have to be provided in respect of members of money purchase schemes, both stakeholder/personal pensions and occupational schemes. In particular, where any member of a money purchase scheme commences the payment of an annuity on or after 6 April 2005, there will be no requirement for any part of the annuity to increase in payment. This will apply equally to benefits that have been used to contract an individual out of the State Earnings Related Pension/State Second Pension and any non contracted-out benefits.

Difficult decisions
Selecting the most appropriate form of annuity has always proved one of the most difficult decisions for members of money purchase schemes, and the Pensions Act 2004 changes will only exacerbate this.
If you are a member looking to take retirement benefits from your money purchase scheme, you will, depending on the provisions of your scheme rules, have a number of choices to make. These include:

- Whether to take a tax-free cash sum

- Whether to take all or, where allowed, part of your benefits

- Whether to take an annuity or, where allowed, to take income withdrawals

If you do decide to take an annuity, there are many further choices to be made including:

- Should the annuity be payable only for my lifetime, or should it make provision for a continuing income to be paid to my spouse in the event of my death? If such a continuing income is to be paid, at what level?

- Should I opt for a pension that remains fixed in payment, or should I take a lower initial pension income but one that will increase in payment , for example in line with changes in the Retail Prices Index or at a fixed rate of 3 per cent per annum?

- Should my pension be payable for my lifetime only or should it be payable subject to a minimum guaranteed payment period of up to ten years? In this latter case, if you were to die during the guarantee period, the balance of payments would normally be made to your spouse/dependants.

- Should I consider a with-profits or unit-linked annuity where my future income will be linked to the performance of the investments underlying my annuity?