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An opportunity to test drive your retirement.

Byline: TREVOR LAW

When you consider what we can change throughout life, your mortgage provider, credit cards, bank accounts, internet provider, partner and some would argue your sex, the same cannot be said about the decision the majority of us have to make at retirement.

Although the industry welcomed the abolishing of compulsory annuity purchase by the age of 75, for many people annuity purchase is the only route.

There are two main reasons for this.

Most people find that the size of their funds don't warrant the additional charges they would have to pay for taking an income from a drawdown fund that avoids purchasing an annuity.

Many want the guaranteed income in retirement an annuity provides. In 2010, 93 per cent of all retirees purchased an annuity.

However only 30 per cent to 40 per cent percent took advantage of the open market option, this being a facility that allows you to accrue a pension fund with one pension provider and purchase your final annuity with another. Looking further afield can be worthwhile increasing your pension by around 15 per cent. The simple fact is that annuity rates are reducing. They are calculated based on life expectancy that is on the increase, the drivers being improved diets, living conditions and medical technology. It is predicted that one in six people will reach the age of 100 and therefore 10 million will receive a royal telegram.

For those who purchase an annuity and make that one-off decision as to how to provide their income after retirement, 64 per cent buy a single life annuity and therefore provide no long term provision for their spouse.

At age 65, 20 per cent of individuals retire in poor health and 50 per cent at age 75 and 75 per cent at age 80 are judged to be in this state. The impaired life annuity market increases annuity rates for individuals in poor health. A fund of pounds 100,000 in this category would today buy an income of pounds 4,663 per annum. After five years of payments, an individual with high blood pressure would find their income rising to pounds 5,016 per annum, and if a smoker the increase would be to pounds 5,238 per annum. The traditional annuity is literally a one-off decision and at no time in the future can it be changed. However the retiree has to gaze into the crystal ball and make assumptions on their life expectancy and that of their partner.

The starting pension is based on a single life annuity. The decision to include provision for spouse, escalation to address the ever increasing problem of inflation and guarantee periods have an overall affect of reducing the starting pension. If the life scenario doesn't happen as planned the individual has received a reduced pension for making the "wrong" decision at retirement and this could be a pension of 30 per cent less than they could have received.

The development of the "third way" annuity market provides an ideal alternative to the traditional annuity route or taking an income from the fund through drawdown, which involves exposure to investment fluctuation. With the "third" market, you are being provided with the comfort of a traditional annuity in respect of a guaranteed income. It also gives you the ability to defer the annuity purchase decision until you have a better idea of your retirement future and also provides a lump sum benefit for your spouse.

The third way option involves the hope that future annuity rates will improve to justify the decision. But it does mean you have removed the future investment risk associated with drawdown and the need to gamble on how your future years will turn out when buying a traditional annuity today.

Trevor Law is a director with Montpelier Group (Europe), the privately-owned independent financial advisers located near Solihull. E-mail: tilaw@montpeliergroup.com
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Title Annotation:Business
Publication:The Birmingham Post (England)
Date:Jul 7, 2011
Words:650
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