Over recent years, as a result of changes in legislation, more modern and flexible alternatives have appeared, allowing you to take control over your future income needs, death benefits and the investment of your pension fund.
This report considers the different options in some detail to ensure that you understand the nature and significance of the advantages and disadvantages of these. It may transpire that, due to your personal circumstances and/or the size of your pension fund, some of the options may not be available or suitable. The current main options available are:
- Delay in taking tax free lump sum and / or income
- Buying a Lifetime Annuity or Enhanced Annuity
- Buying an Investment Linked Annuity
- Buying a Fixed Term Annuity
- Income Drawdown, either in Capped Drawdown or Flexible Drawdown
- Phased Retirement
With the exception of delaying, each of the above options results in your pension funds becoming ‘crystallised’. This simply means that you have chosen to take some or all of your benefits from your pension. When a Benefit Crystallisation Event occurs, the value of the fund used to provide the benefits is measured against your Lifetime Allowance, currently £1.5 million. If the value of your pensions is in excess of the Lifetime Allowance a tax charge may become payable if you have not previously applied for protection against the tax charge. It is therefore important to consider all your pensions and existing pension income when retirement planning.
By considering each of the above options in turn, it is possible firstly to eliminate unsuitable options, and then to identify the most suitable choice for you and ensure that your retirement income is tailored to meet your needs over the coming years.
How you provide for your spouse or partner, should you die before they do, is an important consideration in selecting the most appropriate option for providing an income in retirement. There are a number of ways you can provide income or a lump sum payment to your spouse, partner or family if you die first.
If you arrange an Annuity, you can select to have a joint life option and/or a guaranteed income period which ensures that income payments continue to your spouse, partner or other financial dependants. If the priority is to leave a lump sum on death, this option is available with contracts written under Income Drawdown rules, including Capped Drawdown, Flexible Drawdown and Fixed Term Annuities.
Understanding and deciding which option provides the most appropriate death benefit is one of the most important decisions that you will make; further information on the death benefits of each option is contained within this guide.
The type of income
Many people concentrate on the amount of income that a particular option will pay, rather than the type of income. The main types of income are:
- An income that will remain level, meaning that the spending power is reduced over time by inflation
- An income that will increase in line with inflation
- An income that has the potential to grow due to investment performance
- An income that is paid for a fixed period of time
- An income that can be changed from year to year
If your total pension funds are currently worth less than £18,000 you may be able to access all of the funds under the ‘Triviality’ rules.
This allows you to take the entire pot as a lump sum, with 25% available tax free and the remaining 75% subject to income tax.
The ‘Triviality rules’ are not always straightforward. If you think you may be eligible contact one of our advisers who can discuss your situation in more detail and confirm whether you qualify.
It is important to consider the option of deferring your pension income payments to a future date if possible. Sometimes pension benefits are taken simply because we think they have to be taken. People are often still healthy and active at the age of retirement, and may actually want, or indeed need, to continue to work.
It is often possible to defer taking benefits from the pension fund and use other investments or income sources to cover expenditure requirements. This could of course have the effect of reducing your capital, especially if the income you take is greater than the growth or interest received.
The investment strategy in deferment should be carefully considered to ensure that the fund is not exposed to inappropriate risk.
Should you die before age 75 and you have not taken an income and / or tax free lump sum, your fund is classed as ‘uncrystallised’ and can generally be passed to your spouse or partner without deduction of tax. Death post 75 would attract a tax charge of 55% even if the fund is uncrystallised.
There are a number of advantages to delaying taking benefits:
- The pension fund remains fully invested in a tax-efficient environment
- Lifetime Annuity rates generally rise for older lives, although this rise can sometimes be outweighed by falls in the general level of Annuity rates
- Deferring the purchase of a Lifetime Annuity may allow you to take advantage of future worsening health or a change in personal circumstances
- An alternative income stream, perhaps from other investments, may provide greater tax-efficiency
- Social security benefits may still be available
There are of course a number of disadvantages to deferment:
- Future annuity rates cannot be guaranteed and may have fallen by the time you come to buy an Annuity (of course the reverse could also be true)
- You will not receive the benefit of the income stream that would otherwise have been created
- If the fund remains invested in higher risk investments it could fall in value
- Delaying taking pension benefits may mean other capital has to be used to provide an income, this capital may be in equally tax-efficient investments such as ISAs (Individual Savings Accounts)
It is also possible to defer your State Pension benefits. This results in a small increase to your weekly State Pension benefits, or the payment of a lump sum equivalent to the income that would have been paid, plus interest. The lump sum, or the increase in State Benefits, is treated as income for tax purposes.
Our team of Independent Financial Advisers in are experienced in developing retirement income strategies for clients the length and breadth of the UK. If you are approaching retirement and would like advice on your options call one of our IFAs today on 0115 933 84330115 933 8433, alternatively enquire online or email firstname.lastname@example.org