Traditionally, at retirement, one would have purchased an annuity. However, when you take out an annuity, whilst you do get a known level of income, you do agree the terms at the outset and you can NEVER CHANGE YOUR MIND.
With investment markets being lower than the 2007 high your pension fund value and therefore the money you have available to buy your annuity is low and so you will only be able to buy a lower income. Remember, you can never change your mind so think carefully before buying an annuity.
This may not be what you want to hear if you are looking to retire in the near future and need the income. However, there are some excellent alternatives and these will allow you to take tax free cash and an income straight away but delay committing yourself to a lower than planned income for the rest of your life.
If you wish to consider your alternatives and options we are pleased to be able to provide a review of what you have and provide recommendations in line with your needs and aspirations Independently, Free of Charge and Without Obligation.
There can be significant advantages to keeping your pension invested whilst still taking benefits. Your pension fund, if sensibly managed, will have the opportunity to grow in value over time as the investment markets recover. As your fund gets bigger, you can take a higher income. As you get older, you can legally take a higher income from your fund and will retain the option, up to age 75, to convert the fund to an annuity at any time if you choose to.
In addition, if you delay buying an annuity till you are older you may also get a better annuity and a higher income.
There are some considerations to be made before committing yourself either way but if you are looking to retire soon you should, wherever possible, keep your options open and not suffer a low retirement income for ever just because the timing is wrong.
All of your options covered
Whether you have made your mind up already or want us to guide you along the way, our expert retirement advisers can help you. They can provide advice and research on all UK approved options including:
Unsecured Pension (Income Drawdown or Pension Fund Withdrawal)
Unsecured Pensions are a popular alternative to buying a lifetime annuity. They allow you to take a Tax Free Cash Lump Sum and draw an income from your pension fund whilst it remains invested. The maximum level of income you can draw is about 120% of the non increasing income normally provided from a more traditional annuity, based on a single person of your age and sex; the minimum income is zero. On the death of the individual in income drawdown, the surviving spouse/partner will have a number of options. They could continue with the income drawdown until they are age 75 or until the time their deceased spouse would have reached age 75, whichever is the sooner. The spouse could purchase a pension annuity or take the whole fund as a tax free lump sum and pay a 35% tax charge.
Phased Retirement
You can arrange most personal pensions as a single plan, or as a cluster of many separate plans, sometimes called ‘segments’. You can use these segments to buy annuities or unsecured pension plans at different times. You must use all the segments to provide a retirement income by the time you reach the age of 75, either via a lifetime annuity or Alternatively Secured Pension. This process is called ‘phased retirement’.
Conventional Annuities
Conventional annuities provide a guaranteed income for life. The income is neither subject to investment risk nor mortality risk. This means that it doesn’t matter what happens to stock markets, house prices or any other investments, and, the income will continue to be paid out, even if you smash the longevity record!
Enhanced Rate Annuities
Your smoking habits and any medical condition or conditions, both past and present, can all affect your normal life expectancy. Some annuity providers take this information into account when setting their annuity rates. In some cases, this can mean substantially higher income levels than those payable from standard conventional annuities.
Flexible Annuities
A small number of providers have developed what have been termed “flexible annuities”. These plans combine a guaranteed taxable income for a limited period with the balance of pension funds remaining invested. Typically this works by your pension funds being transferred to a personal pension plan and the tax-free cash entitlement being paid out to you immediately. Some of the pension fund is then used to buy a 5-year annuity, with the balance remaining invested in the new pension plan. This process can then be repeated every five years.
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