SOME PENSION BASICS – THE ‘ANNUITY’

While pensions can be complex and difficult to deal with because of all of the past pension legislation and changes, it is important for everyone to have some grasp of the basic concepts. In this section we are only discussing personal pensions, i.e. not company pensions where the benefit is assessed based on years of service and salary. A personal pension can be viewed very simply as a box into which you are putting money to save until you are aged 55 plus. This box has some advantages, as the Government can also add money to the money that you put in.

Inside the box your savings are looked after for you by a pension company. The pension company finds out how you want to invest your money and will do its best to make extra value for you. If you want no risk, you can arrange to have your savings kept in a cash account. Otherwise there will be an investment risk with your savings and the value can go up and down. Over 10 years and longer the results show that generally people are better off if they take some risk with the money in their pension box.

Come age 55 the happy day arrives whereby you can dip into your pension box. That is the earliest age that you can be for the Government to let you get your hands into your pension box (with some exceptions including serious ill health). This pension box, however, generally does not let you take it all out (except for some exceptions for small pension pots for those aged 60 or over). You can get your hands on 25% of what is in the box. This is tax-free and can be used however you wish. The remaining 75% has to be used to provide an income and this is where we come up against “The Annuity!” While there are various options open to you as regards using the 75% (which we will be happy to discuss), most people will end up getting an “Annuity”. We will now seek to make the “Annuity” concept as simple as we can.