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Legislation surrounding pension contributions and pensions in retirement is currently under review by the government. Major changes are anticipated in the coming months and you should always check with an adviser to ensure you have the latest information.
Pension Commencement Lump Sum
When planning to draw your pension benefits, one of the first things to consider is whether you would like to draw out any Pension Commencement Lump Sum from your pension fund. Under current legislation, up to 25% of the fund can be drawn out, free of tax. This can be used for anything you wish, whether its some home improvements or a long holiday abroad.
Retirement Income
Retirement income can be divided into four main categories.
1) Scheme Pensions - typically, drawing your income directly from your employers occupational pension scheme.
2) Lifetime Annuities - taking your income as an annuity. Commonly associated with drawing income from Personal pension / Stakeholder pension type schemes
3) Unsecured Pension - Pension Fund Withdrawal / Income Drawdown and Phased retirement
4) Alternatively Secured Pensions - A type of income withdrawal that is only available from age 75.
Scheme Pensions
The full details of your scheme pension should be outlined in full in your pension member's booklet. It is normal to receive a copy of the scheme rules on joining and you can probably access a copy of it from your company HR department.
Annuities
Annuities are used to provide a pension income, in the case of pensions this income is guaranteed for life. The pension lump sum is exchange for a pension income. Once the annuity has been bought, the income is fixed, the contract cannot be reversed - the pension lump sum becomes the permanent property of the annuity provider.
The level of income that you will receive from an annuity depends upon several main factors:
•The level of Investment
•Age of 'annuitant'
•Health
•Sex
•The prevailing annuity rates at the point of annuity purchase
In general, the older an annuitant the higher the income which can be secured. Furthermore males usually receive a higher income than females due to generally have a shorter life expectancy.
Annuities, in the main, are supplied by Life Assurance Companies. The underlying 'annuity fund' is usually invested in fixed interest investments, such as long term government gilts in order to maintain the guaranteed income and ensure regular income payments are made to annuitants.
Annuities can be set up to provide different benefits / options:
•Spouses pension (to protect a spouse, by providing an income, following the death of the annuitant)
•Guaranteed payment periods; 5 years is typical but 10 year guarantees are possible
•Escalation of benefits; income can be protected from inflation - RPI linked escalation, alternatively a fixed % annual increase in income can be secured at outset e.g. 5%.
•Annuity income can be linked to investment performance for example by a 'With Profit Annuity' or 'Unit Linked Annuity'.
Traditional annuities provide a guaranteed income however there are other types now available, namely With Profits & Unitised Annuities. They differ from traditional types in as much as the guaranteed element is either reduced or taken away altogether in exchange for the possibility of increased income in the long term.
In respect to a with-profits annuity, a low guaranteed income level is initially secured and then an annual bonus is payable from the (linked) with-profits fund. The level of income therefore fluctuates from year to year and is dependent upon the success or otherwise of the With Profits fund.
Under a unit linked annuity, no guarantees are provided. The income received is dependent upon the underlying performance of the linked fund/s, which will undoubtedly fluctuate over time. With favourable market conditions, a unit linked annuity may, in the long term, produce income that exceeds that of a traditional level or escalating annuity. The problem is that the reverse is also true; adverse conditions may seriously affect the value of a pension income.
Investment Solutions uses state-of-the-art research tools to find the best annuity rate available on the open market, specifically based on your circumstances. If you would like further information simply click here.
Unsecured Pensions
Unsecured Pensions come in two forms: Phased Retirement, and Pension Fund Withdrawal.
Phased retirement, (also known as 'staggered vesting'), allows the purchase of a pension to be phased, thereby allowing flexibility when considering retirement. Phased Retirement plans achieve this flexibility by periodically encashing segments of the plan to produce pension income. These plans are usually split into many individual segments, perhaps a 1,000 or more, to assist the process.
Each year the level of required pension income is determined, this subsequently determines the number of segments which must be encashed to meet the income need. The annual pension income is composed of a combination of tax free cash and annuity from the individual segments. The remainder of the fund remains invested and may benefit from any market growth in its underlying investments.
These plans are available up to the plan holders 75th birthday, at which point the remaining segments must be converted into either pension annuity income or transferred to an Alternatively Secured Pension plan.
Phased retirement plans tend to carry higher management charges and due to their nature are usually only considered suitable for clients holding pension assets in excess of £100,000. One other drawback of these types of plan is that the Pension Commencement Lump Sum (tax free cash) is not available on vesting the pension benefits into the Phased plan. The tax free part of the encashed segments form part of the annual pension income. (Any remaining tax free lump sum is not available until the final vesting of the remaining segments).
Phased Retirement plans are relatively complex and are not suitable for everyone, but they can for some individuals offer a flexible approach to retirement. Careful consideration must be given to an individuals personal circumstances, including the value of their existing pension/s. We strongly recommend advice from us be sought if you are considering this option.
Pension Fund Withdrawal (also known as Income drawdown) is an important retirement option worth considering, particularly for individuals who have pension capital of at least £100,000.
Pension Fund Withdrawal plans were introduced following changes to Pension law in 1995. The changes removed the previous requirement to purchase an annuity at retirement. Pension Fund Withdrawal allows an income to be taken directly from the pension fund itself.
Pension Fund Withdrawal enhances the flexibility in that annuity purchase can be deferred until a time when it may be more suitable. Most of the major insurance companies now offer 'Income Drawdown' plans. These plans still allow up to 25% of the retirement fund to be taken as Tax Free Cash.
Income levels are determined by reference to annuity tables produced by the governments' actuarial department. The maximum income allowable is 120% of the highest level of income determined by the annuity tables, the minimum income which can be taken is nil. These limits allow further flexibility and so perhaps enable full retirement from a working life to be gradually phased in. These plans are categorised as 'unsecured' pension plans, eventually an annuity will need to be purchased, usually by the age of 75, although there is now a further option for individuals reaching the age of 75 years to consider - the purchase of an 'Alternatively secured pension' plan. These rules are subject to change in the coming months. Please ask an adviser for more information.
Pension Fund Withdrawal plans are relatively complex and are not suitable for everyone, but they can for some individuals offer a flexible approach to retirement. Careful consideration must be given to an individuals personal circumstances, including the value of their existing pension/s. We strongly recommend advice from us be sought if you are considering this option.
Alternatively Secured Pensions (ASPs)
The Alternatively Secured Pension (ASP) was introduced as part of the simplification regime. The alternatively secured pension is only available from age 75 and is a form of Pension Fund Withdrawal. It was introduced as an option for those that object to purchasing an annuity due to religious beliefs.
These plans work in a similar way to Pension Fund Withdrawal plans, (see section on Pension Fund Withdrawal), but with the following differences:-
•A minimum income requirement of 55% and a maximum of 90% of the appropriate Government Actuarial Department (GAD) rate for an annuitant aged 75.
•Any payments that fail to comply with these limits will incur a 40% tax charge on the difference between the minimum income limit and the amount of income withdrawal paid during that year.
•Reviews to set the maximum income limit must be undertaken annually, but the annuity rate used must continue to be based on an age of 75, rather than a member's actual age.
•Funds remaining on the death of the member must first provide for any financial dependants and thereafter can be given to a charity with no tax liability. Any surplus beyond this would be subject to a tax charge.
Alternatively Secured pension plans are relatively complex and are not suitable for everyone, but they can for some individuals offer a flexible approach to retirement in later life, particularly if annuity purchase is not an attractive option (for whatever reason). Careful consideration must be given to an individual's personal circumstances. We strongly recommend advice from us be sought if you are considering this option.
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