When you draw benefits from your pension plan there are a number of different options available to you in relation to how these are structured. Below is an overview of the various options available.
Tax Free Cash
Most pension schemes allow you to draw 25% of the fund as a tax free lump sum. You may then use that money however you like. Some older schemes allow a higher rate. Salary related pensions often offer a basic tax free cash amount or a higher tax free cash amount with a corresponding reduction in income.
Many people simply take the maximum tax free cash amount possible (a bird in the hand), but sometimes a higher income can be more attractive over the longer term.
When securing an annuity the option of an increasing payment is available. Increases in line with inflation, (as measured by the retail prices index) or a fixed amount, (such as 3% or 5%) per annum can be selected. Of course, this has an impact on the initial income from day one, which is much lower than with a level payment for life. It takes a number of years for the increasing income to match and then outpace the initially higher level payment. However, the impact of inflation on spending power during retirement, which nowadays could last for twenty or thirty years, should not be underestimated.
Provide for your loved ones
When securing an annuity the option of a dependant’s pension and/or a minimum payment term guarantee is available. Dependant’s benefits can be secured to pay your partner on your death a portion of your pension for the rest of their life thereafter (typically either 50% or 66% of your income). The impact on your pension income will depend upon their age and health.
A minimum payment term guarantee will ensure that should you die in the first few years of drawing your pension the income will continue for a period. Guarantees are measured from the establishment of the plan and typically five or ten years is selected. As you are usually expected to live for at least five years from retirement this option usually does not have a significant impact upon the pension available to you.
Selecting an ‘overlap’ on the policy would see both a guarantee and the spouse’s pension paid at the same time, on early death, until the end of the guarantee period.
Your health and lifestyle
Enhanced annuities (covering 1500 conditions at the last count!) are available to many individuals. As well as the obvious, smoking and ill health, other factors such as weight and alcohol intake have a bearing and could result in a higher income being available. A questionnaire is completed in the first instance, (standard practice when you utilise our completely independent service), this can then be passed to those providers which offer enhanced rates for the underwriters to review. The ‘uplift’ that some individuals can achieve is astounding (61% in one case) and remember this income is payable for life so even a small difference will add up over the years. Please do not simply accept what you are offered by your pension provider!
In addition to the option of securing a guaranteed annuity, you can also draw an income from your pension by way of Capped Drawdown, allowing you to receive an income up to a set amount. Flexible Drawdown allows you to draw as much of your pension fund as you like, chargeable to income tax, providing your other ‘guaranteed’ income from pensions amounts to £20,000 per annum.
There are also temporary annuities, which pay a fixed income for a certain number of years, with a guaranteed fund at the end of that period. Investment linked annuities provide an income with the potential to benefit from stockmarket based returns, usually with a guarantee that the income will not fall below a certain level.
Clearly there are a number of alternatives suitable to individuals with different aims and objectives and these should be discussed with an expert before proceeding.
If you would like assistance with the drawing of your pension benefits please do contact the office to arrange an appointment with one of our highly qualified advisers who will be happy to help.
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Risk Warning - Stockmarket investments can offer income through the payment of dividends and interest and good opportunities for capital appreciation over the longer term. By this, generally we mean periods in excess of five years, preferably much longer. However, we can never promise you particular returns, especially in the short-term. At any point in time but especially in the short term, your capital could be worth less than the original amount invested as some of the selected holdings may fall in value, regardless of expectations at the time of acquisition. We may also invest in funds that hold overseas securities. The value of these investments may increase or decrease as a result of changes in currency exchange rates. Returns achieved in the past cannot be relied upon to be repeated.
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