Money Minder UK

Thinking about cashing in your pension?

A personalised retirement pension drawdown report will help you:

  • See how much income you could get
  • Weigh-up the pros and cons of 'pension drawdown'
  • Understand the merits of an 'annuity'
  • Explore the tax implications
  • See the effect of inflation on your income
  • Find out what happens to your pension on death

 

Why should I get a personalised report?

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Our personalised report will help you to answer these questions:

There are multiple possible income options based on the choices you make. Our report will guide you through the options and clearly state home much income you can get from your Pension it is important because the choices you make at this stage may not be able to be changed easily, or at all, at a later date.

You can use your pension fund to purchase an annuity. If you do, you are essentially spending the capital you have built up in your pension fund to provide you with a secure income, for either a fixed term or until your death. The type of annuity you purchase will determine the level of income it provides.

Some of the pros of an annuity are:

  • You have the option to shop around to find the best buy rates that could increase your income.
  • If you smoke, suffer from ill health or are currently taking any ongoing prescribed medication, it could enhance your annuity income significantly.
  • Once your annuity is set up, your income is secure, will be paid to you for at least the rest of your life no matter how long you live.
  • Your income is not affected in any way by investment market performance and it doesn't need to be reviewed.
  • If annuity rates fall after purchase, your income won't be affected.

Some of the cons of an annuity are:

  • Once your annuity is set up, it is likely that your income cannot be changed in the future, even if your own personal circumstances change.
  • If you were able to 'cash in' your annuity at a later date (the government have said they would like this to be an option for existing and new annuity clients in the future), it may not be financially advantageous to do so.

    Even if a change in legislation allows this to happen, there may be very few providers that would be willing to sell or buy an existing annuity at a price that would be acceptable to the annuitant.
  • If you choose a level income its spending power will be eroded by inflation over time.
  • If you die in the early years, the total income you've received may be less than the pension fund used to buy the annuity.
  • Your income cannot be inherited by your dependents when you die, unless you have included a spouses / dependents pension at the point of purchase or you have put in place a specific guaranteed payment period; for example to ensure payments continue for 10 years or more from outset regardless of when you die.
  • Once you have purchased your annuity, you will not have any remaining funds to pass to your dependents unless you included 'value protection'. More information about value protection can be found in the section about 'death benefits' in our report.

Flexi Access Drawdown essentially allows you to 'draw-down' on your pension fund. In theory you can use the fund like a bank account as you take as much or as little from your plan as you wish. In reality, it's a lot more complex than a bank account and its important to ensure you invest the money in your pension appropiately if you are planning to utilise flexi-access drawdown. You can opt for a regular income, or take frequent or infrequent lump sums.

Some of the pros of Drawdown are:

  • You can take your tax free cash lump sum without taking any income.
  • You can adjust your income according to your lifestyle and tax situation at any time.
  • You can choose where your pension is invested; this can be in funds, shares, Exchange Traded Funds (ETFs), bonds, gilts, cash and more.
  • You can continue to pay pension contributions.
  • If you die before age 75, your whole pension pot can be paid out tax-free.
  • If you die after age 75 your beneficiaries may need to pay tax on the death benefits they receive, dependent on the date they receive the money and their own individual circumstances.

Some of the cons of Drawdown are:

  • You will be responsible for your own investments.
  • Your fund will continue to be exposed to investment risk.
  • The capital value of your fund may be eroded completely, especially if you draw out more income than the fund is making in investment returns each year.
  • There are ongoing charges for continuing to keep your pension fund invested.
  • Legislation may change in the future which may make flexi-access drawdown less attractive or tax efficient.
  • Annuity rates may be at a worse level in the future.

This is what our report will help you to decide.

Simply an annuity is a guaranteed income, where as drawdown is like taking money out of a bank account - it may not last as long as you do.

For some people an Annuity is likely to be the most appropriate option and similarly for other people FlexiAccess Drawdown is most likely to be the most appropriate choice. This report strives to give the information you require in a balanced way, to help you to make the choice that will be most appropriate for you.

The income you receive from your pension fund, whether it is from an Annuity or Flexi-Access Drawdown, may have to last for 20 years or more. Over time, the cost of living (the price of everyday goods) naturally goes up - this is inflation - and one consideration when selecting the level of income you take in retirement is whether to include any sort of provision for the increase in cost of living.

With an annuity you have to select an income option at the outset and once selected it cannot be changed. This means that if you do not include any sort of inflation protection you will be unable to add this at a later stage. This also means that if you chose a 'level' income rather than an 'escalating' income your income will remain at the same level for as long as it is paid (potentially 20 or more years). This in turn means that as prices go up the amount you receive from your pension will not and you will therefore be able to buy less each year.

There is no automatic inflation proofing option with Flexi Access Drawdown however you do have the ability to increase or decrease the level of income you take as your circumstances change. Of course the higher the level of income you take from the remaining fund the less time it will last.

As people get older invariably their health deteriorates. For some people this is earlier than others.

The level of income provided by an annuity will take into consideration an individual's age and health (as well as the options they chose) when determining the level of income they are prepared to provide in exchange for the remaining pension fund.

Most annuity providers will also take into consideration a person's health when they provide an annuity quotation.

As the level of annuity income is based on life expectancy, if an individual has a reduced life expectancy due to health problems then it is likely that they would be able to receive a higher level of income. Health issues that can possibly affect the annuity income level range from a person's smoking habits or a history of high blood pressure to more serious health issues.

Before taking out an annuity you should always check whether you may qualify for a higher level of income via an enhanced annuity.

If you have an annuity, your income cannot be inherited by your dependents when you die, unless you have included a spouses / dependents pension at the point of purchase or you have put in place a specific guaranteed payment period; for example to ensure payments continue for 10 years or more from outset regardless of when you die.

If you are using drawdown on your pension and you die before age 75, your whole pension pot can be paid out tax-free. If you die after age 75 your beneficiaries may need to pay tax on the death benefits they receive, dependent on the date they receive the money and their own individual circumstances.

An appropriate investment strategy only applies to Flexi Access Drawdown. An Annuity works by using your remaining pension fund to purchase an income for life. Your entire fund is given to the annuity provider and you have no responsibility for any investment decisions. The performance of the stock market will make no difference to the level of income you receive.

With Flexi-Access Drawdown your remaining pension fund needs to be invested somewhere and the investment decisions you make are likely to affect the level of income you are able to take later in your retirement. For this reason it is important that you consider what investment strategy you should adopt and the potential effect this strategy could have on the level of income you could receive both now and in the future.

You can choose to take out as much or as little of your pension fund as you wish; any amount from a very small amount to the whole pot. Whatever amount you choose, 25% of the amount you take will be free of tax and the remaining 75% will be added to your annual income and taxed as income accordingly.

For example if you earned £20,000 per annum, your retirement fund is £50,000 and you decided to withdraw £30,000. £7,500 would be paid to you tax free (this is 25% of the amount you have taken (crystallised)) and the remaining £22,500 would be added to your existing £20,000 income. You would pay income tax on the total amount of taxable income you have received. i.e. £42,500.

As part of your retirement income planning preparation, it is important to understand what level of guaranteed income might be payable to you if you were to choose to give up the capital held in your pension fund in exchange for a life long annual income.

With an annuity there are options such as 'Escalation Type', 'Guarantee Period', and a 'Spouse Pension'. We go through all of these in our retirement planning report.

An annuity could potentially be paid for 30 years or more. Over this time the price of goods and services will increase; this is inflation. If you purchase a level annuity the amount you receive each year will remain the same for as long as it is paid. This means that the amount of goods and services your annuity will be able to purchase will be less and less each year.

Whilst a level annuity will give you a higher initial amount compared to an increasing annuity, it will not keep pace with inflation.

You are purchasing an income for the rest of your life. Have you considered what income your family would receive when you die? A single life annuity is likely to give you a higher income level than a joint life annuity however it will only last for your lifetime. Once you die the income will stop and your loved ones will receive nothing.

Your income cannot be inherited by your dependents when you die, unless you have included a spouses / dependents pension at the point of purchase or you have put in place a specific guaranteed payment period; for example to ensure payments continue for 10 years or more from outset regardless of when you die.

With an annuity, long life is not a problem. There is no risk of your retirement income running out. Additionally, if you have a medical condition you might be able to secure a higher level of income. If you have a serious illness that is reducing your life expectancy, buying an annuity might not be the right thing to do.

With flexible access drawdown, living a long and fulfilling retirement could become a problem in the future if you don't get the investment strategy for your pension right. If your retirement ends up being longer than you had expected, you could run out of money. You need to think carefully about how long you need your pension fund to provide you with an income. If you get the investment strategy right, your income could be higher in later years or you might still have some money left in your pension pot to pass on to your loved ones.

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