Retirement Options
Making the Best of Your Pension Fund
Building up a retirement fund
through life is not easy, but once you have managed
to secure a reasonable fund, and you are considering
taking your benefits, it becomes very important that
the right choices are made. The decision used to be
just a simple choice of purchasing an annuity, but
now there are other ways in which you can provide an
income from your pension fund, namely:
- Annuities
- Unsecured Pension (USP)
- Phased Retirement
- Alternatively Secured Pension (ASP)
Whilst these routes can provide a
more flexible approach to receiving retirement
income, they may not be for everyone. It is
important that you receive professional advice from
experienced advisers when considering these
alternatives, so speak to us today.
Annuities
Annuities usually buy you a
guaranteed regular income for the remainder of your
life. Basically, they are arrangements that provide
a regular fixed or increasing income paid in
exchange for the funds built up in your pension
fund(s).
An Overview: Advantages &
Disadvantages:
|
Advantages |
|
Disadvantages |
| You can
select a guaranteed income for life
You can take out a percentage of your
fund as a lump sum, tax-free (maximum
25%)
You can get annuities that are fixed
or increase over time whether linked to
inflation or by a fixed increase, e.g.)
3% |
|
They are
not flexible, once you have purchased an
annuity you are usually "locked in"
Conventional annuities fix your
income using the rates at the time of
purchase, so you could be disadvantaged
if annuity prices increase in the future
Once you purchase an annuity, the
annuity provider retains your capital
and your family will get nothing if you
die after any guarantee period has
expired. |
Unsecured Pension
An alternative to purchasing an
annuity is through the use of Unsecured Pension (USP).
This option, also known as Pension Fund Withdrawal,
allows you to take up to 25% tax-free cash sum from
your pension fund and then take (or "draw down") an
income from the remaining funds. Whilst you are
taking an income, the funds remaining in the plan
are invested according to your investment risk
profile in order to meet your financial objectives.
You can continue unsecured
pension until you are 75, when you must either
purchase an annuity or go into Alternative Secured
Pension (ASP).
An Overview: Advantages &
Disadvantages:
|
Advantages |
|
Disadvantages |
| Your
pension fund continues to have the
potential to increase, so you may have a
higher fund value with which to purchase
an annuity as you get older
You can decide how your money is to
be invested
Usually, the older you are when you
purchase an annuity, the higher annuity
rate you should get
Your beneficiaries have additional
flexible death benefit choices |
|
Whilst
invested, your funds can fall as well as
rise
If the value of your fund goes down,
you would have less to purchase an
annuity in later years
There is an ongoing need to regularly
review your pension fund whist in
deferment
By deferring the purchase an annuity,
any annuity cross-subsidy would be
missed |
Phased Retirement
This is a more advanced but
tax-efficient way of providing you with a retirement
income. It divides up your pension fund into a
number of small segments, [usually 1000 segments (or
units)], thereby providing the opportunity to open
(or ‘crystalise’) the required number of segments in
order to provide you with the required level of
income. The income received is derived from either a
tax free cash payment or a combination of tax free
cash and annuity purchase. It is also possible to
combine this option with the Unsecured Pension
option as opposed to purchasing an annuity, thereby
still deferring the date of annuity purchase.
Any segments still unopened (‘uncrystalised’)
would remain invested as per your investment risk
profile until you require additional income in the
future. At that time, the ‘crystalisation’ method
mentioned above would be repeated. If you were to
die before reaching age 75, then any unopened (‘uncrystalised’)
funds would be paid to any nominated beneficiary
free of any taxation. This is extremely beneficial
if you decide to pass on the funds to your
children/grandchildren as there would be no
Inheritance Tax liability.
You can continue phased
retirement until you reach age 75, when you either
buy an annuity or go into Alternative Secured
Pension (ASP).
An Overview: Advantages &
Disadvantages:
|
Advantages |
|
Disadvantages |
| Your
pension fund continues to have the
potential to increase, so you may have a
higher fund value with which to buy an
annuity as you get older
You can decide how your money is to
be invested
Usually, the older you are when you
purchase an annuity, the higher annuity
rate you should get
Your beneficiaries have additional
flexible death benefit choices with the
opportunity to receive ‘uncrystalised’
funds free of Inheritance Tax |
|
Whilst
invested, your funds can fall as well as
rise
If the value of your fund goes down,
you would have less to purchase an
annuity in later years
There is a need to regularly review
your pension fund whist in deferment
By deferring the purchase an annuity,
any annuity cross-subsidy would be
missed |
Alternatively Secured Pension
(ASP)
Upon reaching age 75 anyone with
a pension fund that has not already commenced taking
benefits (i.e crystalised) or is taking benefits via
Unsecured Penson (USP), must purchase an annuity or
go into Alternatively Secured Pension (ASP).
The ASP option has only become
available since 6 April 2006, and is a variation on USP. The
facility allows a member to continue (or commence if
not already in USP) taking an income from their
pension fund (i.e. "draw down") indefinitely.
Whilst you are taking an income,
the funds remaining in the plan are invested
according to your investment risk profile in order
to meet your financial objectives.
The level of income available in
ASP is calculated by using the GAD tables as
supplied by HMRC and the maximum and minimum levels
available are different than those available in USP.
(GAD levels are capped at the age of 75).
There are also different rules
relating to the death benefits of members in ASP
than those if death occurs in USP, which would have
a significant affect on funds passed on to
beneficiaries.
An Overview: Advantages &
Disadvantages:
|
Advantages |
|
Disadvantages |
| Your
pension fund continues to have the
potential to increase, so you may have a
higher fund value with which to purchase
an annuity as you get older or withdraw
an income
You can decide how your money is to
be invested
Usually, the older you are when you
purchase an annuity, the higher annuity
rate you should get
Your beneficiaries have additional
flexible death benefit choices |
|
Whilst
invested, your funds can fall as well as
rise
If the value of your fund goes down,
you would have less to purchase an
annuity in later years
There is an ongoing need to regularly
review your pension fund whist in
deferment
By deferring the purchase an annuity,
any annuity cross-subsidy would be
missed
Lump sum death benefits are severely
affected by new rules governing
inherited tax-relieved pensions |
If you are considering this
option, then further details and advice on these
issues should be sought by speaking to an
experienced financial adviser.
If you want to know more about
making the best of your retirement fund, please
contact us for a
free initial consultation.
NB...The favourable tax treatment
currently available for SSASs might not continue in
the future.
|
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