Six options to improve your pension pot income
1. Ill-health annuity
Look for an ill-health annuity, which, even for minor health issues, will bump up your income significantly.
2. Temporary annuity
Purchase a temporary annuity for a short fixed period, with a view to buying an ill-health annuity should your health begin to fail.
3. Income drawdown
Income drawdown is now highly restrictive, but you might choose this solution in the hope that gilt yields improve.
4. Investment-backed annuity
An investment-backed annuity might work if you believe the investment climate will pick up, but it is best if you have other assets to fall back on should the underlying investments disappoint.
5. Scheme pensions
Convert to a scheme pension. This is almost always an attractive solution and is not impacted by gilt yield levels and restrictive legislation.
6. Work longer
Work longer to boost your pension fund and eventual payouts.
The general term for the rate of income from an investment expressed as an annual percentage and based on its current market value. For example, if a corporate bond or gilt originally sold at £100 par value with a coupon of 10% is bought for £100 then the coupon and the yield are the same at 10%, or £10. But if an investor buys the bond for £125, its coupon is still 10% (or £10) and the investor receives £10 but as the investor bought the bond for £125 (not £100) the yield on the investment is 8%.
An alternative to an annuity, income drawdown (also known as an unsecured pension) allows you to take income from your pension fund while the fund remains invested and so continues to benefit from any fund growth. The drawdown of income has to be calculated carefully as taking too much income could exhaust the pension fund so experts say the annual drawdown must not exceed what the assets would normally yield in an average year. The invested pension fund could also be hit by market turbulence and the value of the assets could fall.
In exchange for any lump sum – usually your pension fund – an annuity is “bought” from an insurance company and provides an income for life. When you die, the income stops. Annuity rates fluctuate daily and depend on your sex (although from 21 December 2012 insurers will no longer be able to use gender as a factor when calculating annuities), age, health and a number of other factors, so you have to pick the right one and, once bought, its terms cannot be altered, so seek financial advice.