Your Pension Options on Retirement
You will have several options on retirement. These options can be confusing but help is at hand. Our specialist pension and retirement planners can help you cut through the jargon to understand what the options are, and what the best is for you.
Tax Free Lump Sum - You will be able to take a tax free lump sum, usually 25% of the value of your pension fund. In some cases the lump some can be more.
Retirement Income Options - After any tax-free cash has been taken, the remainder of your pension fund will have to be used to provide income. You can do this in several ways:
- Lifetime Annuity – a guaranteed income for the rest of your life.
It is important to take advice as your decision on annuity is irreversible. You do not have to take an annuity from your pension provider. You can use your “open market” option to shop around for the best annuity rate for you
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- Impaired Life and Enhanced Annuities – can provide greater annuity income because of ill-health or other lifestyle circumstances e.g. smoking.
- Income Withdrawal – income taken from your pension fund while it remains invested - an alternative for those not wanting an annuity immediately.
- Hybrid Plans – combinations of the above and other alternatives now available.
Advice on your Retirement Options
To provide suitable pensions advice, our specialist advisers need to gather detailed information about your requirements, your personal and financial circumstances, your pensions, and your attitudes. We will then recommend a suitable course of action, which we will confirm in a written report.
We do not charge for a recommendation. If we arrange a transaction for you, we will provide you with a “Key Facts about the Cost of Our Services” document before doing so. You will not be charged a fee unless you have specifically agreed it in advance, and any commissions will be disclosed to you in writing before any transaction is completed.
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Sometimes known as a conventional or traditional annuity, it is a guaranteed income for the rest of your life. You buy it with your pension fund from life insurance companies or other financial institutions. The income you receive depends on such factors as
- your age
- your sex
- your health (if it is poor, you may qualify for an impaired life annuity)
- the optional benefits you choose such as a dependant’s pension that will continue to be paid after your death, any annual increases in the level of annuity and the level of guarantee period required.
Most importantly, there is competition among annuity providers. Some offer more income than others – You do not have to take the annuity from your pension provider - you can take what is known as an open market option. This allows you to shop around. Our specialist retirement advisers can let you know if the rate you have been offered is the best annuity rate for you currently available in the market place.
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Optional Benefits
There are several options that you can build into your annuity –
A joint-life annuity - this continues to pay an income to your spouse or civil partner after your death. You can usually choose between one that pays your partner 100%, 2/3rds, or 50% of what you were receiving.
An escalating annuity – a level lifetime annuity pays the same income year after year for the rest of your life. To protect your income from rising prices, you can choose an escalating annuity, which pays a lower initial annuity but then increases each year. There are two main choices:
- Fixed-rate escalating annuities – your income is guaranteed to increase at a fixed rate each year, say, by 3% or 5%;
- RPI-linked annuities – your income is adjusted each year to reflect changes in the Retail Prices Index
A guarantee - A single-life annuity will only pay out during your own lifetime. If you die shortly after buying an annuity, it will not have paid out much. To guard against this, you can choose an annuity with a guarantee period of usually five or ten years’ worth of income. If you die within this period the income will continue to be paid for the rest of the guarantee period.
Most people choose one or more of these optional benefits. But each comes with a cost that reduces the starting level of your pension income. Our specialist retirement advisers will help you decide if these options are suitable for you and what effect they will have on your income.
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Some companies offer impaired life annuities that pay you a higher income if you have health problems that threaten to reduce your lifespan.
You might be able to get an enhanced annuity i.e. more income if you are overweight or smoke regularly. Some companies offer higher rates to people who have followed certain occupations and to people living in certain parts of the country. These are some of the lifestyle and medical conditions that could get you increased income;
| Enhanced Annuity |
Impaired Life Annuity |
- Regular cigarette smoker
- Obesity
- High Blood Pressure
- High Cholesterol
- Heart Attack
- Multiple Sclerosis
- Digestive or Bowel Complaint
- Dementia
- Diabetes
- Chronic Asthma
- Stroke
- Cancer of lung, breast, bowel, pancreas, liver
- Bladder or Liver Complaint
- Emphysema
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- Secondary malignant cancers
- Some primary malignant cancers
- Chronic Lung Disease
- Motor Neurone Disease
- Parkinson's Disease
- Chronic heart disease
- Kidney disease
- Multiple Sclerosis
- Hodgkin's Disease
- Alzheimer's Disease
- AIDS
|
Our specialist retirement advisers can let you know if you might qualify for a higher retirement income from an impaired life or enhanced annuity.
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Income Withdrawal is also known as Pension Fund Withdrawal or Pension Drawdown. You can take up to 25% of your pension fund as a tax-free lump sum. You then draw a taxable income from what is left. Meanwhile, the rest of your pension fund stays invested in a favourable tax environment. The maximum level of income you can draw is 120% of the amount you would get from a level single-life lifetime annuity. As long as you keep within the maximum limit, you can normally draw the income how and when you like during the year.
Who might Income Withdrawal be suitable for?
- Those who do not want or need a regular pre-set income
- Those who wish to avoid buying an annuity
- Those who want the tax free lump sum only for the time being
- Those would rather keep control over the investment of their pension fund
- Those who are happy to take an investment risk with a view to improving their retirement income
- Those who are attracted by the death benefit options
- Those with alternative sources of income.
What are the risks?
Leaving aside any flexibility that Income Withdrawal offers, you will be taking an income from a fund that remains invested in asset-backed investments, such as the stock market, property or gilts. For you to be better off than if you had taken the lifetime annuity option at outset, your invested fund needs to grow well enough, after income and charges etc. If investment returns are lower than expected, your fund might fall in value, and you might receive a lower income in future. This is only an option until age 75.
Regular Reviews
You and your adviser should review your plan each year to
- Check that your fund is growing enough to make up for the income you’re taking from it.
- Consider changing the income you withdraw – up, or down, within set limits.
- Consider changing the funds your pension is invested in, with possible re-balancing back to the initially agreed investment split(s).
- Consider whether income withdrawal continues to be suitable for you.
- Consider stopping the arrangement at any time and use your fund to buy a fixed-term or lifetime annuity.
If you are considering Income Withdrawal, it is essential to get professional advice. Our specialist retirement advisers will help you decide if Income Withdrawal is suitable for you, explain the risks, and help you choose appropriate investments.
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If you do not want to commit yourself to a lifetime annuity but do not want the investment risks of income withdrawal, hybrid plans 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 are 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.
These plans can be very different from each other, but variously they can offer;
- more income control and flexibility than standard annuities
- more death benefit options that standard annuities
- greater flexibility after age 75
However,
- Future annuity payments may be lower than expected if investment returns are lower than projected.
- The income is not guaranteed and may fall as well as rise. This means that they are more risky than standard annuities.
Example of Income Control - When a traditional annuity is set up, the options selected cannot be changed a later date even if the circumstances change. For example, if it is a joint life annuity and your spouse or partner dies, or health problems reduce your life expectancy, a traditional annuity cannot be re-priced. Or if your circumstances changed and you wished to alter the level of income, you cannot change your income. Some Hybrid plans can provide the chance to reorganise your income to suit your new circumstances.
Investment-Linked Annuity
Investment-linked annuities put your pension fund into investments, such as stocks and shares. This means that you could continue to benefit from stock market investments after retirement, but there is also the risk that the value of your investments could fall.
Investment-linked annuities can be either with-profits or unit-linked.
With an investment-linked annuity, you will be linking your income in retirement to the ups and downs of the stock market instead of receiving a pre-set income, as you would with a lifetime annuity. The more risky the underlying fund you choose, the more your retirement income may vary – both up and down.
Phased Retirement Planning
Instead of using your entire pension fund to provide benefits straight away, you can retire gradually. Phased retirement uses part of your fund to take some benefits tax-free cash and some income, while the rest of your fund remains invested. You can use another portion of your fund to buy more benefits later, and so on until all your fund is being used to provide retirement income. Phased retirement is a useful financial planning strategy to provide gradual increasing income if you want to give up work gradually and start to replace your earnings with pension income. It also provides more flexible help for your survivors if you die. The part of the fund you have not converted to annuity will remain invested for you until decide to take it, or until you reach age 75.
If you are planning your retirement income, help is at hand. Our specialist retirement advisers will help you choose the right options for you.
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Who Are These Options Available To?
All of the above options are available to anyone who has a pension fund, including any of the following:
- a personal pension;
- a stakeholder pension;
- a group personal pension plan arranged through your employer;
- a retirement annuity contract (this is similar to a personal pension but was issued before 1988 when personal pensions first became available);
- a free-standing additional voluntary contribution (FSAVC) scheme
- an employer’s occupational pension scheme that builds up your own retirement fund – often called a money purchase or defined contribution scheme
- the type of additional voluntary contribution (AVC) scheme that builds up your own investment fund;
- a section 32 policy (sometimes known as a transfer plan) – used to transfer benefits from a previous employer’s occupational pension scheme
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