Products
Annuities are the most popular way to secure a retirement income from the funds built up inside pensions but there are other options:
These products require careful consideration because they are complicated and carry an investment risk that you need to clearly understand. We are happy to provide more comprehensive details with explanations, including the pro’s and con’s and quotations, if required.
Income withdrawal:
Allows income to be drawn directly from the pension fund within limits, currently between 0 and 100% of the highest income allowable in the annuity tables set out by the Treasury. Tax free cash can still be taken up to 25% of the fund. This can be very useful to help balance the income needed and tax due to be paid.
IMPORTANT INFORMATION ABOUT DRAWDOWN
In line with the Finance Act 2011, all new drawdown pension calculations, or drawdown reviews, effective on or after 6 June 2011 will be subject to new rates.
Following the first emergency Budget carried out by the Government in 2010, the maximum percentage of the relevant annuity that can be paid in drawdown has been reduced. The Government Actuary’s Department (GAD) tables used to calculate the relevant annuity have also changed. Click here to view: GAD Tables
This means that for people in drawdown, there could be a significant change in the maximum pension that can be paid in the future, compared to what was available before April.
What does this mean for you?
- For those entering drawdown for the first time on or after 6 June the new basis will apply.
- For people already in drawdown, the maximum income level will not change until their next review (call us if you are unsure when this will be).
- New benefits will be set up with a three year review period rather than the old five year period.
Drawdown is now referred to as capped drawdown; some clients may be able to use flexible drawdown instead if they qualify.
This now means that taking drawdown rather than annuitising is a more complicated decision. We can can even look to mix and match your pension options between scheme pension, annuity, capped and flexible drawdown to make the best of your income needs and personal tax position.
We can calculate the income available from all types of pension options. Please give us a call if you would like to review all of the options available to you.
The complexity of the product, the investment risk and the higher charges on these products usually mean they are only suitable for larger funds. Penion income drawdown plans are relatively complex and are not suitable for everyone, but they can for some individuals offer a flexible approach to retirement. Careful consideration must be given your circumstances, including the value of your existing pensions. We strongly recommend that you receive advice if you are considering this option. If you are interested in income withdrawal, please call us for a free consultation.
Releasing pension tax free cash:
A form of income withdrawal allows you to release a tax free cash lump sum of up to 25% of the value of your pension fund. You do not have to take the full 25% tax free cash, this is just the maximum.
You do not necessarily have to retire or draw an income from your pension in order to release tax free cash. If you don’t want to take the income now the remaining fund stays invested until you retire.
Taking Tax Free Cash from your pension early means you will have a smaller pension pot at retirement. It is very important that you receive advice based on your personal circumstances before deciding on unlocking your tax free cash.
Third Way Products:
In order to overcome some of the inflexibility of annuities, where all the decisions have to be made at outset, and the uncertainty of income withdrawal, where income depends on investment performance some providers have launched alternative retirement plans. The main advantage with third way products is the flexibility they offer, this can be a real help if curcumstances change such as health deteriorating or changes in martial staus which have such a major bearing on the income available from annuities.
A third way product will use part of your pension fund to purchase a temporary annuity which will pay you an income for 5 years then end. The remaining balance of your fund either remains fully invested or can have a guaranteed maturity value so that when the temporary annuity ends you can use the fund or maturity value to either take income withdrawal or annuitise or complete another temporary annuity for another 5 years.
Where the remaining funds are exposed to investment risk there is no guarantee that the investment will perform as expected . There is also no guarantee that annuity rates don’t deteriorate over the 5 years meaning you would be worse off than if you had taken a standard annuity from outset.
Phased Retirement
This isn’t really a product but rather a feature of most types of pension. Your pension fund will usually be split into 1000 little pension plans and you could decide to “vest” or take benefits from, for example, 200 of these plans and leave the remaining funds invested.
This can be very useful for people who are retiring gradually and want to supplement their income using tax free cash and income without taking all their benefits at once.
Deferring the purchase of the annuity does not guarantee a higher level of future income, as annuity rates can go down as well as up and the value of the continued investment of your pension fund may go down as well as up.
FSA Pension Factsheets
For further information you can download the FSA produced Money Made Clear brochure outling the annuity options available at retirement or call us for more information.
