Your retirement options
The decisions people make about how to take their retirement income can be among the most important of their lives, potentially making a huge difference both to their standard of living and the amount of money they are able to leave to their heirs.
Under current UK legislation you may take retirement benefits from an approved pension scheme at any time after your 55th birthday.
Upon retirement pension savers are able to take 25 per cent of their funds held in approved UK pension schemes as tax free cash (known as “pension commencement lump sum”), with the remainder used to purchase an income. The two most common forms of retirement income for pension savers with defined contribution (money purchase) pension schemes are annuities and income drawdown.
An annuity is an income that is paid for the remainder of your life (and potentially for your spouse’s life, dependent on the policy you buy), which is purchased from an insurance company. The level of income that might be paid out depends on the terms of the annuity (for instance whether or not it increases with inflation, or provides a survivor’s pension), your age, state of health and even your postcode. Since December 2012 it has been illegal for annuity provider's to take the annuitant's gender into account when calculating rates.
To learn more about annuities, please click here.
Drawdown, meanwhile, involves withdrawing money directly from your pension fund in order to provide a retirement income. This is usually subject to strictly enforced statutory limits in order to ensure that you do not run out of money before you die but has the advantage for some people that it enables them to pass on what remains of their fund to their heirs, subject to a tax charge (currently 55 per cent - although the Govenment announced in the 2014 Budget document that it would review this in future and has said it will make a further announcement in its 2014 Autumn Statement).
Drawdown, like annuities, comes in a number of forms – including a “drip-feed” option which offers some individuals significant tax benefits. To find out more, click here.
The choice between annuities and drawdown is not always “either/or” – and in the case of larger pension pots a hybrid approach is possible. For example current legislation allows individuals who have a “secure” (eg State Pension, annuity and/or final salary pension) retirement income of £12,000 per year to use the remainder of their fund to enter “flexible” drawdown, which allows you to withdraw more from your pension fund than a standard drawdown plan. In his 2014 Budget the Chancellor of the Exchequer announced a major shake-up of the legislation surrounding this area and, from 6 April 2015, this restriction will be removed. In July 2014 the Government further clarified its proposals in this area, full details of which can be found here.
Another retirement income option is known as “scheme pension”. This is currently quite esoteric, only suitable in specific circumstances and requires detailed advice – to discuss its pros and cons in your case, or any other pension matters, please call our team on 01565 653804 or send us an email.