Money Minder UK

Retirement options

The first option is to purchase an annuity with your accumulated fund. Buying an annuity will provide you with a guaranteed regular income in exchange for the value of the fund that you have built up.

If you are about to draw benefits from a Personal Pension, you have the ability to “shop around” to ensure you get the best rates available from your fund. This could increase the income you will receive substantially and advice should always be taken.

There are various options available when you purchase an annuity, for example you can arrange for it to be paid for a guaranteed period, to your spouse following your death, and at a level that increases each year either by a fixed percentage or in line with the Retail Price Index.

The major advantage of an annuity is that you, and if required your spouse, will receive a guaranteed level of income for life. However, on the downside, you will exchange the lump sum you have built up for this fixed income.

The level of income you have guaranteed cannot respond to your changing personal financial circumstances. In addition you will effectively lock into the annuity rate that is available on the day. This rate may or may not be favorable depending on current interest rates and long term gilt yields. Also, depending upon how the annuity is established, the death benefits payable to your spouse may not be as high as under other options. Finally, there is no possibility of future investment growth on your pension fund.

Other options available to you are to utilise phased retirement and/or pension fund withdrawal (otherwise know as income drawdown). Some insurance companies offer both of these options within an overall retirement options' package.

A phased retirement plan is divided into numerous segments, which allow you to control your retirement fund and convert it gradually over a number of years into income in the form of annuities.

The income that you take each year is made up of part tax free cash and part annuity. There are several advantages to taking your income in this way, firstly you can use your tax free cash as "income", thus reducing your overall liability to income tax. The balance of your pension fund that has not been cashed in will continue to be invested which dependent on investment performance and future annuity rates may mean that a higher income can be taken in future years.

A further major advantage of this type of plan is that you are able to alter the level of income you take by choosing the amount and the timing of the separate annuities you purchase. This enables you to plan around both your personal financial circumstances as well as the prevailing annuity rates.

Finally, upon your death, some of the remaining pension fund that has not been converted to an annuity payment may be payable as a lump sum to your spouse or beneficiaries free of Inheritance Tax.

A pension fund withdrawal (Income Drawdown) plan facilitates the tax free cash lump sum to be taken and an income to be drawn from your pension fund without immediately purchasing an annuity.

An annuity can be purchased at any time. Since April 2006, it has been possible to defer buying an annuity even later than age 75, however, due to the complicated rules and potential tax penalties that apply to this option, most people will convert their pension fund to an annuity before their 75th birthday.

There are several advantages of using such a plan.

Firstly, subject to limits imposed by legislation, you are able to plan in advance the level of income that you wish to take each year, to adapt to changes in your personal financial circumstances. The value of your pension fund will continue to be invested until you decide to purchase your annuity. Depending upon investment returns, this may provide you with the opportunity to achieve sufficient growth to improve your benefits.

In addition, this type of policy can be useful when trying to mitigate both income tax and inheritance tax, by using varying levels of income. You can defer the purchase of an annuity in the hope that annuity rates will rise, although there is no guarantee that this will happen prior to your 75th birthday.

Finally, death benefits provided by this type of plan can be both higher and more flexible than that available from a conventional annuity. However, a 55% tax charge will apply to any lump sum death benefits payable from a pension fund withdrawal plan from which you have started to draw an income.

The way you decide to take your income from your pension is very important and you should seek specialist advice before making a decision.

If you would like to look further into investing into a Personal Pension plan, you can contact us at info@money-minder.com or call us on 0845 218 9194 between 8am and 8pm Monday to Friday and 10 am to 2pm on Saturdays when we will be happy to discuss your requirements further.

We are able to offer a full independent financial advice service and recommend appropriate solutions to your needs that will take account of your personal financial circumstances.