Whether your pension fund has been created solely by you or with help from one or more employer, there is every chance that it has taken a large part of your working life to accumulate. Combine this with how it may well represent a significant part of your overall wealth and it is easy to see why deciding how to access your pension benefits could be one of the most important financial decisions you ever make.
For some people, having absolute security of income level in retirement may be paramount. For others, having flexibility in terms of how much income they take, or having the potential to pass part of their fund on to their family upon their death, may be more important.
Three of the main options are summarised below, but for some people the best solution is a mix of more than one arrangement.
Remember that if you buy an annuity with your pension fund now, the decision cannot be undone if it turns out to be the wrong course of action. If you are unsure as to which is the best route for you, or if you’d value some professional advice delivered in a friendly and understandable way, why not contact us today?
Option 1: Annuities
- An income that remains level or one that starts lower but increases by a known amount each year.
- An income that ceases on your death or one that is lower but will also provide a proportion of it to any dependants that outlive you.
- An income that is paid for your lifetime but is guaranteed to be paid for a fixed term even if you die in the meantime.
For those people who have health issues such that their life expectancy is reduced, as well as for many of those who smoke, enhanced rates are available from either mainstream or specialist annuity providers.
It is also possible to purchase a non-conventional annuity that, whilst not absolutely guaranteeing the maintenance of the initial level of pension income, offers the potential for the income to increase over time.
Finally, the Financial Conduct Authority now requires every pension provider to remind people if their plan offers an open market option and encourages policyholders to shop around in order to obtain the best annuity rate. Being independent, AMR has access to a wide range of annuity providers - so we can do the hard work for you.
Option 2: Income Drawdown
Although the plan holder’s income is not secured in the same way as it might be with an annuity, the pension drawdown route offers a number of advantages of its own:
- The tax free lump sum entitlement can be accessed in full or in part with the balance deferred and taken at a later date.
- Although often subject to a cap, the income you withdraw can be varied each year. This can be helpful, for example, where more income is required in the early years because your state pension is not yet payable. A second example might be where the plan holder intends to work on a part time basis for a period before fully retiring at some point in the future. Here, a lower level of pension income might be sufficient in the early years.
- If annuity rates are low when you need to start receiving your pension income you may be reluctant to buy an annuity in the belief that they will improve in the future. Safe in the knowledge that you can buy an annuity at any time, you may choose to take an income via the drawdown route in the interim.
- Subject to any tax charge prevailing at the time, drawdown offers the potential for any unused pension fund to be passed to your family on your death even if they are no longer financial dependents.
Drawdown pensions are a specialist retirement vehicle and are not suitable for everyone. You should therefore seek professional advice before considering this type of contract.
At AMR, we have over 18 years of experience, both advising clients on drawdown arrangements and managing the investment of their pension fund.
Option 3: Phased Retirement
This approach uses only part of the accumulated pension fund each year, and in particular uses the tax- free cash amounts for income purposes. It can be conducted through sophisticated encashment processes, or alternatively by breaking down the pension fund into a number of segments. The nature of the arrangement produces a series of ongoing income streams which are derived either from an Annuity or a Capped Drawdown plan.
The decision as to how quickly to phase-in your benefits is yours. Each element of phasing will provide an additional tax-free cash lump sum, and will increase your ongoing income stream by the value of the Annuity or Capped Drawdown arranged. This will continue until your entire pension fund has been crystallised. These arrangements offer a number of advantages but the most significant are:
- That part of your tax free cash that remains ‘uncrystallised’ continues to benefit from being held in a tax-advantaged pension arrangement.
- As part of the ‘income’ is provided by tax-free cash, the level of Income Tax paid can be minimised. This can be beneficial in the early years of taking benefits for those who may be subject to higher rate Income Tax because, for example, they continue to work or have other sources of taxable income.
- On death, the value uncrystallised remains under pre-retirement rules which are more tax-efficient than post crystallisation rules.
Phased drawdown pensions are a specialist retirement vehicle and are not suitable for veryone. You should seek professional advice before considering this type of contract.