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Third Way Annuities

Making a decision about how to use your pension fund when you retire can be extremely complicated. Many people don’t want to take the long-term option of a lifetime annuity when they’re still relatively young. However, they’re also not keen on the risks associated with income-drawdown products. There is an alternative, though, with Third-Way Annuities.

What Is a Third-Way Annuity?

Third-Way Annuities are relatively new but they’re becoming increasingly popular. Most people take out a Fixed-Term product, but there are also With-Profit or Unit-Linked annuities.

With a Third-Way Annuity, you receive a specific monthly income for a set period of time. After this you’ll be given a Guaranteed Maturity Amount, which you can then use to purchase another Fixed-Term product or a more traditional Lifetime Annuity.

This way you’re still receiving a fixed income but on more flexible terms. Once you reach the end of your term, your circumstances may have changed and the decision you make at this point can take this into account.

There’s very little risk with this type of annuity, as it doesn’t have to be linked to investments. The amount you eventually receive is clear at the start of the contract, allowing you to budget on a monthly basis as well as plan for the future.

The main disadvantage is that the starting incomes are generally lower than you would get with a Lifetime Annuity. However, you’re paying for the greater flexibility that this type of product offers.

Why Choose the Third Way?

When you choose a Lifetime Annuity it’s a fixed decision and you can’t know if changes in your circumstances at a later date will make it unsuitable. Some retirees don’t want to opt for these products too soon for a number of reasons.

Currently annuity rates are at extremely low levels, but if they increase in the future those who’ve already taken out products will lose out. There’s also the worry about committing to a Lifetime Annuity, particularly if you’re still fit and healthy. In the near future your medical circumstances may change and you could be eligible for an Enhanced Annuity, paying out a higher monthly income. If you haven’t already taken out a Lifetime Annuity then you can take advantage of these changes.

Some people don’t want to take a monthly income as soon as they’re entitled to it. With a Third-Way Annuity you can opt to simply take the tax-free money and not have any income at this point. Once your fixed term expires, you can then re-evaluate the situation and choose to draw an income if required.

Choosing your final retirement option is a difficult decision that requires careful planning. If you’re considering a Third-Way Annuity then speak with an independent pension adviser to ensure that it’s a suitable option for your circumstances.

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