Your Options At Retirement
When you reach retirement, there are a number of ways you can use your pension fund to provide you with an ongoing income. Here are some of the options you will need to consider. You can find more detailed explanation in our Retirement options factsheet.
Usually a personal pension fund carries the option to take 25% of the fund as a tax-free lump sum. If a maximum income is required, it is usually better to take your maximum allowance of tax-free cash from a money purchase pension plan. However, this depends on individual circumstances and we can assess this to make sure it is right for you.
With a traditional annuity, you pay the money in your pension pot to an insurance company in exchange for a guaranteed income for the rest of your life. After your death, the income will usually cease and the insurance company keeps the balance of the initial investment. This is dependent upon a number of additional options, such as an extended period of guaranteed payments or capital value protection.
You can purchase an annuity based on single or joint lives. A ‘reversionary annuity’ is also available, in which the pension is payable in full for the lifetime of the annuitant and then on their death a reduced pension will be payable to their dependant.
As an alternative to a conventional annuity, you can choose to purchase an unsecured pension, also known as a drawdown. As part of the investment choices within an Income Drawdown plan (IDD), you can buy a short-term annuity. The maximum income is the equivalent of 150% of the Government Actuary department rates and there is no minimum requirement.
A drawdown scheme can be useful in certain circumstances. These might include an active interest by the member in continuing to manage their pension fund. However, the expenses associated with a drawdown scheme are often higher because of ongoing management and monitoring and they are usually best suited to substantial pension funds.
After 6 April 2015 it will be possible to draw any amount from your pension scheme with 25% being available tax free and anything else subject to tax at your marginal rate.
Phased Income Drawdown
Phased Income Drawdown is an option best suited to those under the age of 75 who do not require full access to their tax free cash. It can be particularly tax-efficient in that income is made of both capital and tax free cash.
As for traditional Income Drawdown, only those with larger pension funds and a more active interest in pension fund management should consider this type of scheme.
It is now possible to obtain underwritten annuities for individuals in ill health. One obvious form of enhanced annuity is for cigarette smokers. In the same way that smokers may now pay 25% more for their life cover, smokers could obtain up to 15-20% better annuity rates. While we would always look to underwrite any medical problems, severe ill health is sometimes better dealt with via a drawdown or high-level reversionary annuity.
As demand for flexible retirement solutions grow so does the products available including many 'Fixed Term Annuities' and 'Third Way' schemes. In an ever changing market, we always recommend that you consult and expert before committing to any one scheme.
For more information about our retirement planning services, simply complete our enquiry form, send us an email or call our Cambridge office on 01223 357131 or our Norwich office on 01603 661156.