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Retirement Options
If you have benefits in a company pension scheme that provides retirement benefits based on your service and salary with the company will provide you with a scheme pension
If you have benefits in schemes in which you have built up a fund, such as a personal pension, stakeholder pension, retirement annuity contract, free standing additional voluntary contributions, then you have a number of options to choose from for taking an income from your pension savings.
You can convert your pension savings into an income from age 50 (going up to 55 by 2010) and you must convert them by age 75. You can take part of your fund as a tax free lump sum (usually up to 25%)
If the total of all of your pension funds is less than a minimum amount (£17,500 for the tax year 2009-10) you can take all of your fund as a lump sum although you will pay tax on some of the fund. You must be at least age 60 and you must convert all of your pension funds to cash within a twelve month period.
Lifetime Annuity
Traditionally, retirement income has been secured through the purchase of a lifetime annuity either from your existing pension provider or an insurance company of your choice using the open market option. The annuity guarantees payment of the income until you die.
When buying an annuity you must decide the options you wish to include such as:
An annuity for your lifetime only or one that continues to be paid to your partner if you predecease them and’ if so, at what level. An annuity which does not increase or one that increases each year at, for example, a fixed rate, in line with changes in the Retail Price Index or is linked to the performance of investments. An annuity which includes a guarantee that it will be paid for say 5 or 10 years even if you die during this period. Include a protection lump sum death benefit which in the event of your death will pay out an amount equal to your original pension fund minus the income you’ve already been paid.You may also be able to qualify for an impaired life annuity if you have certain health problems or an enhanced annuity if you are overweight, smoke regularly or have worked in certain occupations or live in certain parts of the country.
Whilst the guarantee if an income for life is attractive, the disadvantage is that you must make decisions on the type of annuity you purchase at outset and you cannot subsequently change the annuity in response to changes in your circumstances.
Unsecured Pension
If you are not ready to buy an annuity you can take benefits through what is called an unsecured pension by buying a short term annuity or using income withdrawal or drawdown as it is often referred to. Under both options your pension fund, after taking any tax free cash, will remain invested.
Short Term Annuity
With a short-term annuity, you can use part of your pension fund to buy a fixed-term annuity
lasting up to five years. You can choose your annuity options in much the same way as basic annuities. In the meantime, the remainder of your fund continues to be invested. At the end of the term of the annuity you can buy another short-term annuity. You can also combine income from a short-term annuity with income withdrawal. You can continue in this way until you are ready to buy a lifetime annuity or by age 75.
Income Withdrawal
With income withdrawal you can take a taxable income direct from your pension fund. This is also known as income drawdown or pension fund withdrawal. Income withdrawal is an option with most personal pensions and some occupational money purchase schemes. In some cases if you are in an employer’s scheme and want to use income withdrawal, you must first transfer your pension rights from the employer’s scheme to a personal pension. HM Revenue & Customs (HMRC) sets a limit on the maximum amount of income you take from the fund. You must review your arrangement every five years to make sure it is within this limit. There is no minimum amount of income that must be taken.
An unsecured pension gives you greater flexibility to make changes to your retirement income in response to changes in your circumstances and greater flexibility on what happens to your fund on your death. However, you will continue to be exposed to investment risk and your income will not be guaranteed for your lifetime.
Hybrid Products
If you don’t want to commit yourself to a lifetime annuity but don’t want the investment risks of an unsecured pension, hybrid products pay a regular income and offer guarantees of either investment growth or the amount of pension fund you can expect to have left to buy an annuity later on. They vary in what they’re called, the guarantees they offer and the charges they make to cover the cost of the guarantees. You generally have to give up some investment growth potential to pay for the guarantees.
Phased Retirement
A number of the above options will allow you to phase in your pension benefits over a number of years should you not wish to take all your pension benefits at one time.
Alternatively Secured Pension
An alternative to buying an annuity at age 75 is to use an alternatively secured pension which allows you to continue to draw an income from your pension fund similar to income withdrawal. On the death of the member the only authorised payments are a dependant's pension or a lump sum left to a charity. Any other payments such as lump sum payments to family members will be unauthorised and subject to punitive taxes.
If you wish to discuss the above further or require information on any of our services, then please contact us.
Any reference to legislation and tax is based on FPP’s understanding of UK law and HMRC practice. These may be subject to change in the future. Tax rates and reliefs will also change and their value to you will depend on your individual circumstances. No guarantees are given regarding the effectiveness of any of the above strategies.