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Retirement Options

As retirement age approaches you will be presented with a number of options as to how to take the retirement benefits which you have built up throughout your working life.

As well as a tax free lump sum of up to 25% of your fund, the income options might include

  • Annuity Purchase
  • Flexi-Access Drawdown
  • Uncrystallised Funds Pension Lump Sum (UFPLS)
  • ‘Scheme Pension’
  • Phased Retirement
  • Temporary Annuity

Having spent your working life saving for retirement, making the right choices when the time comes is clearly crucial; particularly when the sums involved are substantial.

You can download the Money Advice Service Independent Guide “Your pension: it’s time to choose” which outlines your Retirement Options.

Annuity Purchase.

Where you have built up funds in a personal pension plan and wish to convert them into a fixed and secure lifetime income then you can achieve this by purchasing an annuity.

You have to decide what features you want to include at the outset such as frequency of income payments, inclusion of a spouse’s pension on death, automatic increases etc. Once the annuity is purchased the basis on which it was set up cannot be altered.

You need not purchase your annuity from the same pension provider to whom you paid your contributions but can instead exercise an ‘open market option’ whereby the accumulated fund can be used to secure an annuity with another company offering better rates. A link to the Financial Conduct Authority comparitive annuity tables is given below.

Annuity rates are generally driven by interest rates and mortality considerations so the older you are the better the rate should be. Furthermore, if you are a smoker or have a poor health record you could obtain more favourable terms from specialist annuity providers.

Finally, be aware that some older pension policies include valuable Guaranteed Annuity Rates which are well above those currently available on the open market.

 

Flexi-Access Drawdown.

Introduced in April 2015, flexi-access drawdown allows you unlimited access to your pension fund provided you have attained at least age 55. It is the main alternative to annuity purchase but carries greater risks.

The first 25% of the fund is tax free but any withdrawals above this are subject to income tax at the recipient’s  marginal rate.

A prudent approach to flexi-access drawdown would be to withdraw a sustainable level of income from your pension arrangement whilst leaving the remaining fund invested.

However, as mentioned above, this option does allow unlimited access to the fund so it is possible to withdraw all of the capital in a single installment – although doing so could give rise to substantial income tax charges in the year of payment.

As well as offering flexibility of income, a perceived advantage of flexi-access drawdown is the fact that on death before age 75 the residual fund can be paid to your beneficiaries as income or capital free of all taxes. On death after age 75 the residual fund can still be paid out but it would then suffer tax at the recipient’s marginal rate.

It should also be noted that by taking income from your pension plan in this way, your Annual Allowance is automatically reduced to £10,000 thereby restricting your ability to make further tax relievable pension contributions.

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