At Retirement
Your Options at Retirement
If ever there is a time to take financial advice, it is at retirement.
With effect from the 6th April 2006 pensions legislation has changed. While this means more options and flexibility for those approaching retirement than ever before, it remains crucial for all preparing to take benefits from their pension plans to receive financial advice to ensure they are getting the most out of their money. This is particularly true as the Government continues to “tinker” with the detail of pensions legislation.
The rule still remains that (in almost every circumstance) you must take benefits from your pension no later than age 75. However there are now a number of options available when taking benefits and each will offer different options in relation to income, security, and ongoing flexibility. You may no longer have to buy an annuity if an alternative option is more suitable.
Take a deep breath !
Tax Free Cash
You will now be able to draw 25% of your accumulated fund as Tax Free Cash to spend or invest as you wish. This will include benefits accrued in Additional Voluntary Contributions (AVC’s), Free Standing Additional Voluntary Contributions (FSAVC’s) and Protected Rights (Contracted Out) pension funds.
The more tax free cash you choose to take, the lower your income will be. You may also only take tax free cash once, so think about your personal situation before you make your decision.
Triviality
If, when you come to come to draw benefits from your pension fund, you find it is small, you may be able to take the entire fund as a lump sum. If your total pension fund is less than 1% of the lifetime limit (i.e £16,500 for the tax year 2008/9), then you may elect to receive your fund as a lump sum, of which 25% will be tax free, 75% being subject to income tax.
Pension Death Benefits
The differences between death benefits depend primarily on whether you are in receipt of your pension.
Death Before Retirement - The value of your pension benefits will be measured against the Lifetime Allowance, and is normally paid to your beneficiaries or estate without any tax charge. Any benefits valued over the Lifetime Allowance (£1.65m for 2008/9) will be paid to your beneficiaries, or estate, subject to the Lifetime Allowance Charge of 55% if paid out as a lump sum, or 25% if payable as a spouse or dependents income. Any pension payable would be subject to Income Tax.
Death After Retirement – Annuities - Any spouse or dependents benefits incorporated into the annuity will be taxed at the recipient’s income tax rate. Lump sum benefits payable under the Value Protected Annuity will be subject to a tax charge of 35%.
Unsecured Income – Income Drawdown (to age 75) - Your spouse or dependants have three options:
1. They can continue to draw a taxable income from the pension fund until age 75
2. They can purchase an annuity of which income is taxable
3. They can opt to receive the residual fund less a tax charge of 35%
Lifetime Annuity
With every annuity purchase you are able to source the market to find the provider who will offer you the best rate for your money (known as the open market option). You may select a level annuity, which will pay a fixed income for life, or an escalating annuity, which either increases each year at a fixed rate or one that rises or falls in line with inflation.
In exchange for your pension fund the chosen company provides a promise to pay you an income for the rest of your life. You may chose to incorporate spouse’s benefits and / or guarantees but this will reduce the initial income payable.
Value Protected Annuity
The value protected annuity offers a residual balance to be paid to your estate upon death. If the gross income paid is less than that used to purchase the annuity the balance is repaid to your estate, subject to a 35% tax charge.
However, value protected annuities are not permitted past the age of 75, therefore, if you have already passed the age of 65 you will need to consider whether a traditional annuity with a 10 year guarantee is more suitable than a Value Protected Annuity.
Enhanced or Impaired Life Annuities
These may offer higher income payments for those who are smokers or who have medical conditions that may reduce their life expectancy. Some companies also offer higher annuities depending on your occupation or where you live.
Once your annuity is in payment you will not be able to change any aspect of it so you need to think carefully about the type of annuity you need.
Unsecured Pension
The unsecured pension is often described as income drawdown prior to age 75 and there are two different types.
1. Short Term Annuity
The short term annuity will allow you to use part of your pension fund to buy a fixed term annuity lasting up to 5 years with the remainder of your fund being invested within an unsecured pension plan. This will offer more choice as to when you purchase an annuity, but you need to be aware of the risks of investing the remainder, as the value of your fund can fall as well as rise and will affect the income you may draw in the future.
2. Income Drawdown
Income drawdown allows you to draw 25% tax free cash and vary the income taken between certain limits depending on your circumstances.
The remainder of the funds are invested in accordance with your risk profile in order to potentially increase the return on your pension plan, and make up for charges and income withdrawn at the same time as sustaining future income. Decisions need to be made carefully as your residual pension fund could fall as well as rise, leading to a lower income than could have been obtained by purchasing a Traditional Annuity.
Income limits available are between 0% and 120% of the maximum annuity that could have been purchased via the traditional annuity route. This income level will is reviewed every 5 years. This option provides flexibility for those who wish to retire, access their tax free cash but delay taking an income until it is required.
The higher the income taken the greater the returns needed on your fund in order to maintain its purchasing power for the future.
On attaining age 75 it is necessary to decide whether you wish to purchase a Traditional Annuity with the remainder of your pension fund, or move to an Alternatively Secured Pension.
There are many advantages to an unsecured pension over traditional annuities, primarily, flexibility and potential protection of the fund for your beneficiaries. There are also significant disadvantages, primarily risk and cost. Sign up for more information on retirement, pensions and annuity rates below.
