Retirement Income Solutions
After spending a number of years planning carefully for your retirement it is essential that you are aware of the various options open to you at your selected retirement age with regards to your accumulated pension fund.
Conventional Annuities
As the name would suggest, this is the traditional method of securing an income for life. Your accumulated fund can be used to purchase a guaranteed income, which could be level in payment or increasing in line with a fixed percentage or inflation.
It is also possible to incorporate additional benefits such as a widow(er)s pension, guaranteed minimum payment periods etc, but these options will utilise more of your fund, resulting in a lower initial pension.
In addition specialist annuities are becoming increasingly available such as impaired life annuities and annuities for individuals with a reduced life expectancy because they smoke.
Any tax-free lump sum, which is available from the pension fund, must be taken at outset.
One of the main attractions of a conventional annuity is that it offers a guaranteed income for life.
Once the annuity has been purchased, it cannot be altered or surrendered. This makes the conventional annuity very inflexible.
Investment Linked Pension Annuity
An investment linked Annuity offers an income for life similar to conventional annuities. The difference is where the assets securing the annuity income are invested and the degree of risk to the income. It invests in real assets and has the scope to grow in line with economic conditions.
The basis of the arrangement is that a level of annuity is established at the outset based on an expected bonus rate. If the bonus rate is met, the income from the annuity will remain at the original rate. If the bonus rate is exceeded the annuity will increase and conversely if the anticipated bonus is not achieved then the income will decrease. Different providers use different methods to calculate bonus rates, however the principle of this type of arrangement is that the funds remain invested in real assets with a degree of guarantee whilst providing an annuity income.
With an investment linked Annuity clearly then there is the potential for growth as the investment is linked to underlying assets. However, the make up of this fund will be critical as to the future performance of using this type of annuity.
Phased Retirement
This approach involves exchanging a proportion of the pension fund for an annuity and a proportion of the available tax-free lump sum on a regular (usually annual) basis.
This can be very attractive for clients who have a more substantial pension fund. It provides wider choice and enables an individual if required to take a combination of tax-free lump sum and annuity payments. The advantage of this approach is that it enables clients to take income in stages and the balance of the fund remains invested.
By phasing retirement it is possible to increase the guaranteed income received each year to suit your changing lifestyle and personal circumstances. Each year different types of annuities can be considered. Changes, for example, can include the requirement to buy a single life annuity after the death of a dependant as opposed to having had to commit to the higher cost of buying a joint life annuity at the outset.
Clearly, this approach is unsuitable for individuals who require all of the tax-free lump sum available to be paid as one lump sum at the commencement of taking retirement benefits. This is because under the 'Phased' route a tax-free lump sum is taken in proportion to the amount of pension being exchanged for an annuity.
A particular advantage of this approach is the fact that on death before the age of 75 part or all of the remaining fund which has not already been used to purchase a series of annuities can be available as a lump sum payable to the chosen beneficiaries.
Pension Fund Withdrawal
The essence of a Pension Fund Withdrawal arrangement is that pension income is taken by drawing income on a regular basis from the pension fund rather than purchasing an annuity. The amount of income that can be taken is dictated by the Government Actuary Department and must be taken within the approximate bands of 100% to 35% of the equivalent single life conventional annuity that could have been provided by the fund. Tax-free lump sum is taken at outset.
This route offers more flexibility on death prior to attaining age 75 or before an annuity has been purchased.
Pension Fund Withdrawal allows you to choose when and how to take the proceeds of your pension plan to best suit your circumstances. You can vary the amount that you take to suit your own needs - tailoring your investments to meet your personal attitude to risk and also enjoy investment freedom whilst enjoying an income.
Your money remains invested in the assets of your choice. This route allows you to remain invested after drawing an income from the plan, giving you the opportunity to manage the tax you have to pay by controlling the level of income you receive each year. As with the 'Phased' route, in choosing this approach it is very important that we consider your attitude to risk and access to alternative sources of income and carefully monitor the progress of the arrangement throughout retirement.
In taking the Pension Fund Withdrawal route it is very important that you are aware that annuity interest rates can rise and fall as eventually an annuity will need to be purchased to secure pension benefits (currently at age 75) with the remaining fund that has not already been used to purchase an annuity (if any).
In addition, the level of benefits available depends upon a number of factors including the performance of the investment portfolio. The value of portfolio can go down as well as up. High levels of income withdrawals can erode capital, especially if investment returns are poor, or the amount of income withdrawal is high. In the long-term, this could reduce funds available for future annuity purchase or future income withdrawals.
The government is very keen to provide greater flexibility in post-retirement and as such it is likely that legislation will continue to change in the future. It is therefore essential that you take specialist advice before committing to a particular retirement plan, to ensure you are effecting the contract most suited to your requirements.
We now know that the government is proposing to introduce a range of new legislation affecting pensions in 2006. For information on how this may affect you, please use our Financial Services Enquiry form and request the 'Pensions - The New Tax Regime' guide.
Important Note: The value of an investment and any income from it can go down as well as up and you might not get back the original amount invested. The past is not a guide to the future.
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