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In this section we consider the main types of pensions offered by the insurance market. We explain what the key features of these pensions are. Of course, the final step is to match this with your own choice of preferred features for your pension.
The two main types of pension offered by the market are:
The pensions market offers many variations of these two annuities – this section focuses on the core features of these two main types of annuity.
A “life annuity” typically has the following features:
A concern that is sometimes raised about a life annuity is that you don't get the full value of your retirement capital back if you and your spouse die soon after you retire. This is the "insurance premium" that you pay for the promise that your pension will be paid even if you live much longer than expected (e.g. to age 100).
In order to check your own understanding of the features of a life annuity, please complete the following table by giving each of the key features a rating of 0 to 4. A rating of 4 indicates that this feature is strongly represented; a rating of 0 means that the life annuity does not contain this feature.
Life annuity | Your rating |
---|---|
Choice |
|
You must have a high degree of investment expertise |
|
Security |
|
Inheritability |
|
Low cost structure |
The Fund’s rating of these features in set out in the table below. You can check your understanding of a life annuity by comparing your rating to the Fund’s.
The rating is somewhat subjective so you should not be concerned if your rating is 1 point higher or lower than the Fund’s. On the other hand if your rating for a feature is much higher or lower than the Fund’s then you should revisit your understanding of a life annuity.
Feature of a life annuity | Fund’s rating | Reason for our rating |
---|---|---|
Choice | 1 | You only have choices at the start of the pension |
You must have a high degree of investment expertise | 0 | Insurer makes all the investment decisions |
Security | 4 | The current pension is guaranteed by the insurance company paying the pension. Future increases may or may not be guaranteed. |
Inheritability | 2 | Your surviving spouse continues to receive a pension after your death. |
Low cost structure | 4 | This is generally a cheap form of pension. |
As from March 2024, retiring members have the option to take a Living Annuity from the Fund itself - your retirement capital stays invested in the Fund, and the Fund pays you a pension each month. If you are interested in this option, please ensure you read the section below, to understand Living Annuities, and then please read the Leavers' Pack (download from Home > Member Guides) to understand the in-Fund living annuity option and its terms and conditions, and the other pension options available to you.
A “living annuity” operates like an Investment Account, as is explained below.
Minimum draw-down: 2.5% of the starting balance in your Investment Account
Maximum draw-down: The lesser of:
17.5% of the starting balance in your Investment Account
or
the amount of a single-life “life annuity” (with no guarantee and no increases) that can be secured with the living annuity capital. The insurance company will advise you what the maximum draw-down is. It is likely to be much less than 17.5%.
All of these are significant risks with a “living annuity”.
As before, in order to check your understanding of the features of a living annuity, please complete the following table by giving each of the features a rating of 0 to 4:
Living annuity | Your rating |
---|---|
Choice | |
You must have a high degree of investment expertise | |
Inheritability | |
Low cost structure |
Our own rating of the features is set out in the table below. Again you can check your understanding of a living annuity by comparing your rating to ours.
Features of a living annuity | Fund's rating | Reason for our rating |
Choice | 3 | You have the flexibility to vary to your income and investment strategy each year |
You must have a high degree of investment expertise | 3 | You will need to decide where your money is invested, although you may be helped by a financial advisor |
Security | 1 | There is a risk of running out of money if investment returns are poor, if you draw too much pension, or if you live too long |
Inheritability | 4 | Your surviving spouse continues to receive a pension on your death, and the remaining capital is available for your family after both of you are dead. |
Low cost structure | 1 | This is a much more expensive structure – you will also need to pay your financial advisor out of your Investment Account. |
The information contained in this guide does not constitute advice by the Board of Trustees or by its advisors. If you need more information on how you can invest your retirement benefit, you should seek professional advice from a licensed financial advisor.