We simplify all those essential financial decisions
THE EDUCATION SECTION Updated April 2013Every month we look at a particular financial topic in a little more detail. This month it is the options available at retirement.____________________________Itwasn’tsolongagothatthechoiceswhentakinganincomeinretirementweresimple-youeither took the benefits from a Company pension scheme or bought an annuity. Thosedaysarenowdistantmemoriesaseachnewyearseemstobringanotheralternativetotakinga standardannuity.Inthisarticlewetakeaquicklookatsomeofthemajoroptionsthatareavailable whenchoosingtotakesome-orall-ofyourpensionincome.Adownloadablebrochureexplainingall the options in more detail is available at the end of the article.Lifetime Annuity•Regular and secure income for life•Tax free cash provided at outset and fund used to purchase an annuity paid for life•Your annuity income is paid at least annually and can increase or remain level in payment•Additionaloptionscanbeselectedatoutsetsuchasannualincreases,spouse'sbenefitsorguaranteeswhich reduce your own income•Onceyouhaveboughtyourannuity,youcannotusuallychangeyourmindorchangebenefits.Ondeaththere may also be the option of a capital payment less taxEnhanced Annuity•Similartoalifetimeannuityinthatitissimplyaseriesofpaymentsmadeatselectedintervalsinreturnfora pension fund•A higher income can be provided, dependent on for example, health status & smoking status•Nearly 2/3rds of annuitants are eligible for some form of enhancement whe taking an annuityWith Profit Annuity•Similartoalifetimeannuityinthatitissimplyaseriesofpaymentsmadeatselectedintervalsinreturnfora pension fund•Themaindifferenceisthattheinitialpensionlevelandfutureincomelevelsarealsodependentonthe performance of the underlying with profits fund•Anassumedfuturebonusrate(ABR)isselectedatoutsetbytheinvestor.ThehighertheABRthegreaterthe initialincome,howeveriftheactualbonusrateofthewithprofitfunddoesnotequaltheABRthentheamountof pension payable will decrease•Most with profit annuities offer a minimum guaranteed level of pensionUnit Linked Annuity•Verysimilartoawithprofitannuityinthatithasallthesameoptionsandfeaturesbutisinvestedinunitlinked funds rather than a with profits fund•Theinitialpensionandfutureincomelevelsarealsodependentontheperformanceoftheunderlyingunitlinked funds.•Oftentheinvestorisallowedtoassumeafuturerateofgrowth.Thehigherthisassumedratethegreaterthe initialincome,howeveriftheactualgrowthdoesnotmatchthisratethentheamountofpensionpayablewill decreasePhased Retirement•Part of your fund and part of your tax free cash are used in segments to provide income•Thebalanceofthefundnotusedforincome/taxfreecashremainsinvestedwithaviewtoprovidinghigher future benefits•Your starting annuity is smaller, but is supplemented by a portion of your tax-free cash sum•Eachyearyoudecidehowmuchfundtouseforannuitypurchaseandhowmuchtaxfreecashisusedto supplement your income•Because you don't commit all your funds to buy an annuity immediately, you keep your options openDrawdown Pension - Capped•Tax free cash lump sum paid at outset and fund remains invested. Income can also be selected if required•The balance of the fund not used for income remains invested with a view to providing higher future benefits•Youcanchoosetheincomeyouwant,andwhenyouwantit,broadlybetweenniland120%ofanequivalent single life annuity•If investments do well, you may benefit from higher future income payments, and vice versa•On death, the remaining fund is available to pay benefits to your family or dependantsDrawdown Pension - Flexible•Tax free cash lump sum paid at outset and residual fund (subject to income tax) can be accessed immediately•Immediate access to the entire fund•Nomaximumwithdrawal.Mustproveasecuredfixedpensionincomeofatleast£20,000pafromotherpension sources•If the entire plan benefits have been taken, there is no further payment on death•Iftheindividualchosetoaccessonlysomeofthefunds,remainingoptionsondeath(asundercapped)remainan optionThird Way•Tax free cash lump sum paid at outset and fund remains invested. Income can also be selected if required•The balance of the fund not used for income remains invested with a view to providing higher future benefits•You can choose the income you want, and when you want it, in line with drawdown - some plans offer an income 'lock in' guarantee•If investments do well, you may benefit from higher future income payments. Some plans offer an investment growth 'lock in' guarantee•On death, the remaining fund is available to pay benefits to your family or dependants, depending on plan type selectedTriviality•For someone over 60 with a total pension fund of less than £18,000, the entire fund can be paid as a lump sum•Small funds of £2,000 or less held in personal pension arrangements can be paid out as lump sum payment to individuals aged 60 or over, regardless of existing pension provision.•Tax free cash is usually a maximum of 25%. The remaining fund is taxed as earned incomeBROCHURE DOWNLOADIf you have any comments or need further information please do not hesitate to contact us.
SuitabilityUnitLinkedannuitiesaremostlikelytosuitindividualswhowantsomeguaranteeontheirpensionpaymentsbut alsowantthepotentialtobenefitfromfutureinvestmentreturn.Theythereforesuitindividualswithlowtomedium attitudestoriskandsecurity.Theyalsosuitindividualswhohaverelativelysmallpensionfundsandwhowillbe heavily reliant on their pension income.Tax Free CashTaxfreecashmustbewithdrawnatoutsetthentheresidualfundisexchangedforaseriesofpayments.Onceanannuityhas been purchased there is no further entitlement to tax-free cash.Income Annuitypaymentsaretaxedinthesamewayasdescribedunder'TraditionalAnnuity'.Incomewillincreaseordecreasein payment depending on fund performance relative to the assumed growth rate.Death BenefitsTheoptionofwhattypeofdeathbenefitstoincludemustbemadeatoutset.Theoptionsavailablearethesameasunderthe Lifetime Annuity.Advantages•Youwillreceiveanincomeforlife,andyoucanelectforyourspouse/partnertoreceiveanincomeorlumpsumlesstax upon your death. •Tax-free cash is available at outset. •The contract is relatively simple to understand and there is minimal paperwork needed to start the payment of benefits.Disadvantages•The selected income level is not guaranteed and is subject to future investment returns. •Charges will be higher than under a 'Traditional Annuity'.•Anyoptionstoprovidebenefitsondeathmustbeselectedatoutsetandwillresultinalowerinitialpensionpayment. These selected benefits cannot be altered in the future.
SuitabilityWithProfitannuitiesaremostlikelytosuitindividualswhowantsomeguaranteeontheir pensionpaymentsbutalsowantthepotentialtobenefitfromfutureinvestmentreturn.Theythereforesuit individualswithlowtomediumattitudestoriskandsecurity.Theyalsosuitindividualswhohaverelativelysmall pension funds and who will be heavily reliant on their pension income.Tax Free CashTaxfreecashmustbewithdrawnatoutsetthentheresidualfundisexchangedforaseriesofpayments.Onceanannuityhas been purchased there is no further entitlement to tax-free cash.IncomeAnnuitypaymentsaretaxedinthesamewayasdescribedunder'LifetimeAnnuity'.Incomewillincreaseor decrease in payment depending on fund performance relative to the ABR.Death BenefitsTheoptionofwhattypeofdeathbenefitstoincludemustbemadeatoutset.Theoptionsavailableare the same as under the Lifetime Annuity.Advantages•Youwillreceiveanincomeforlife,andyoucanelectforyourspouse/partnertoreceiveanincomeorlumpsumless tax upon your death. •Tax-free cash is available at outset. •Chargesaretakenatoutsetandarereflectedintheannuityrateoffered.Thewithprofitfunddeductschargesbefore bonuses are declared. •Thecontractisrelativelysimpletounderstandandthereisminimalpaperworkneededtostartthepaymentof benefits.Disadvantages•The selected income level is not guaranteed and is subject to future investment returns. •Anyoptionstoprovidebenefitsondeathmustbeselectedatoutsetandwillresultinalowerinitialpensionpayment. These selected benefits cannot be altered in the future.