RETIREMENT INCOME OPTIONS
The purpose of your pension is to provide you with an income in retirement. Benefits can usually be taken any time from age 55 but employer related schemes may stipulate a different age. Commonly, up to 25% of your accumulated fund can be taken as a tax-free lump sum, and the balance should be used to provide income either by a scheme paying a scheme pension directly from the scheme, purchasing an annuity on the open market option (OMO) or via one of the available alternatives such as Drawdown or Phased Retirement.
Most commonly offered by Final Salary Schemes (Defined Benefit schemes). The Pension fund pays a scheme pension directly from the scheme itself.
An annuity is a contract with an insurance company to provide a regular income for life in exchange for a lump sum. The annuity can be level, increase each year to keep pace with the cost of living, offer a guarantee period and/or provide a continuing income for a spouse/dependant on your death.
There are two forms of Drawdown Pension, known as Capped and Flexi-access.
Capped Drawdown – Although all new drawdown arrangements are now Flexi-access, existing capped arrangements can still continue. In Capped Drawdown, after drawing all of the Tax Free Cash up front, the balance of the fund remains invested with withdrawals being taken directly from the fund. There are limits on the amount of income that can be taken. For a Capped Drawdown plan set up post 27th March 2014, the Government Actuaries Department (GAD) has set the maximum level of 150% of a conventional level annuity and depends on current interest rates. There is no minimum so effectively you do not need to draw any income. These limits are reviewed every three years up until age 75 and annually thereafter. Existing Capped Drawdown arrangements can be transferred to Flexi-access if required, this may be with the same supplier.
Flexi-access – under new rules introduced in April 2015 all new drawdown arrangements will be classed as Flexi-access. Existing Flexible Drawdown will automatically become Flexi-access which removes restrictions on how much can be drawn out. With this plan, after drawing the Tax Free Cash, all of the fund can be drawn at outset, taxed as income.
Phased retirement enables you to take part of your pension as required over the years from age 55. Your benefits will usually be divided into 1,000 identical segments so that you can ‘crystallise’ any number of policies as and when you require to achieve the income requirement. Income is therefore made up of part Tax Free Cash and part annuity/drawdown. Ideal for those who do not require an immediate Tax Free Cash lump sum to be paid.
We will be able to provide more details and make a recommendation based on your own circumstances.