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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.

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 on 01254-660444 for a free initial consultation.

NB...The favourable tax treatment currently available for SSASs might not continue in the future.

Retirement Options — Making the Best of Your Pension Fund

Annuities

Unsecured Pension

Phased Retirement

Alternatively Secured Pension (ASP)

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