Retirement Options

The Financial Group

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THE EDUCATION SECTION Updated April 2013 Every month we look at a particular financial topic in a little more detail. This month it is the options available at retirement. ____________________________ It wasn’t so long ago that the choices when taking an income in retirement were simple - you either took the benefits from a Company pension scheme or bought an annuity. Those days are now distant memories as each new year seems to bring another alternative to taking a standard annuity. In this article we take a quick look at some of the major options that are available when choosing to take some - or all - of your pension income. A downloadable brochure explaining all 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 • Additional options can be selected at outset such as annual increases, spouse's benefits or guarantees which reduce your own income • Once you have bought your annuity, you cannot usually change your mind or change benefits. On death there may also be the option of a capital payment less tax Enhanced Annuity • Similar to a lifetime annuity in that it is simply a series of payments made at selected intervals in return for a 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 annuity With Profit Annuity • Similar to a lifetime annuity in that it is simply a series of payments made at selected intervals in return for a pension fund • The main difference is that the initial pension level and future income levels are also dependent on the performance of the underlying with profits fund • An assumed future bonus rate (ABR) is selected at outset by the investor. The higher the ABR the greater the initial income, however if the actual bonus rate of the with profit fund does not equal the ABR then the amount of pension payable will decrease • Most with profit annuities offer a minimum guaranteed level of pension Unit Linked Annuity • Very similar to a with profit annuity in that it has all the same options and features but is invested in unit linked funds rather than a with profits fund • The initial pension and future income levels are also dependent on the performance of the underlying unit linked funds. • Often the investor is allowed to assume a future rate of growth. The higher this assumed rate the greater the initial income, however if the actual growth does not match this rate then the amount of pension payable will decrease Phased Retirement • Part of your fund and part of your tax free cash are used in segments to provide income • The balance of the fund not used for income / tax free cash remains invested with a view to providing higher future benefits • Your starting annuity is smaller, but is supplemented by a portion of your tax-free cash sum • Each year you decide how much fund to use for annuity purchase and how much tax free cash is used to supplement your income • Because you don't commit all your funds to buy an annuity immediately, you keep your options open Drawdown 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 • You can choose the income you want, and when you want it, broadly between nil and 120% of an equivalent 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 dependants Drawdown 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 • No maximum withdrawal. Must prove a secured fixed pension income of at least £20,000 pa from other pension sources • If the entire plan benefits have been taken, there is no further payment on death • If the individual chose to access only some of the funds, remaining options on death (as under capped) remain an option Third 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 selected Triviality • 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 income BROCHURE DOWNLOAD If you have any comments or need further information please do not hesitate to contact us.

Suitability Unit Linked annuities are most likely to suit individuals who want some guarantee on their pension payments but also want the potential to benefit from future investment return. They therefore suit individuals with low to medium attitudes to risk and security. They also suit individuals who have relatively small pension funds and who will be heavily reliant on their pension income. Tax Free Cash Tax free cash must be withdrawn at outset then the residual fund is exchanged for a series of payments. Once an annuity has been purchased there is no further entitlement to tax-free cash. Income Annuity payments are taxed in the same way as described under 'Traditional Annuity'. Income will increase or decrease in payment depending on fund performance relative to the assumed growth rate. Death Benefits The option of what type of death benefits to include must be made at outset. The options available are the same as under the Lifetime Annuity. Advantages • You will receive an income for life, and you can elect for your spouse/partner to receive an income or lump sum less tax 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'. • Any options to provide benefits on death must be selected at outset and will result in a lower initial pension payment. These selected benefits cannot be altered in the future.

Suitability With Profit annuities are most likely to suit individuals who want some guarantee on their pension payments but also want the potential to benefit from future investment return. They therefore suit individuals with low to medium attitudes to risk and security. They also suit individuals who have relatively small pension funds and who will be heavily reliant on their pension income. Tax Free Cash Tax free cash must be withdrawn at outset then the residual fund is exchanged for a series of payments. Once an annuity has been purchased there is no further entitlement to tax-free cash. Income Annuity payments are taxed in the same way as described under 'Lifetime Annuity'. Income will increase or decrease in payment depending on fund performance relative to the ABR. Death Benefits The option of what type of death benefits to include must be made at outset. The options available are the same as under the Lifetime Annuity. Advantages • You will receive an income for life, and you can elect for your spouse/partner to receive an income or lump sum less tax upon your death. • Tax-free cash is available at outset. • Charges are taken at outset and are reflected in the annuity rate offered. The with profit fund deducts charges before bonuses are declared. • 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. • Any options to provide benefits on death must be selected at outset and will result in a lower initial pension payment. These selected benefits cannot be altered in the future.