Question: Can I still buy an annuity after purchasing one of your income protection plans? What are the positives and negatives against such a move?
Fiona Tait - Scottish Life
It is possible to buy an annuity at any time after investing in an income drawdown plan. This has the major advantage of securing a known level of income so that you can manage your monthly/annual budget. Annuity income is guaranteed to be paid (so long as the annuity provider remains solvent) and so it is can be regarded as very secure.
The main downside is that once an annuity is purchased it cannot normally be varied if your circumstances change. You can choose to build in some flexible options such as access to alternative investment funds, annual increases to the level of income and a spouse's pension in the event of your death, however these options come with a cost.
A decision has therefore to be made at the outset of the plan whether to purchase the maximum level of income or to accept a reduced income in exchange for some flexibility, and this cannot be changed at a later date. Sometimes it makes sense to put off making this decision until your circumstances are less likely to change, for example when it is clear whether or not you should purchase a spouse's pension.
Generally speaking you are likely to get a better annuity conversion rate the older you are, however this could be offset by changes in market conditions. If interest rates fall then the annuity conversion rate will be less advantageous, if they rise it could get better. This is normally less of a priority than the requirement to secure a known level of income but may be an influencing factor in your decision as to when to commit to an annuity.
Stewart Dick - Hornbuckle Mitchell
Our SIPP plans allow the individual to draw pension benefits via Income Drawdown / Unsecured Pension (USP), Alternatively Secured Pension (ASP) for those over 75, or by Scheme Pension. However, we don't offer an income protection plan.
For those clients who like the flexibility of income drawdown, but still want a degree of security in their income there are a number of options available. One would be to use part of their pension fund to stay invested and provide an income via drawdown, and then use part of the fund to purchase a conventional annuity to supplement this income. Another option would be to use an investment product that offers a level of guaranteed return, often structured as a Trustee Investment Plan (TIP) or similar, as an asset of the SIPP. The income from this part of the portfolio then underpins the income being drawn from the plan as a whole.
Once in income drawdown there is no problem at all with the client then opting to purchase an annuity at some point in the future. The positives and negatives will be client specific, but will centre around issues such as the security of a guaranteed income versus a potentially higher income that could fluctuate, the need for investment flexibility, the different death benefits available under each and so on.
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