So you’ve worked hard all your life contributing to your pension plan as and when you could afford too. The time has now arrived to retire and you have some important decisions to make about how to best use the pension funds you have built up during your working life. These decisions involve how you intend to draw your pension income to ensure the benefits best suit your needs in retirement.
Because the arrangement of an Annuity can be quite complicated it is always a good idea for people to seek help from an expert in financial services in order to arrange the purchase of their future income. Remember that once you’ve bought an Annuity, you cannot normally change your mind and you cannot get back any of your pension fund. You will however, always have the benefit of an ongoing income for the rest of your life.
Retirement Options
When you decide to take your retirement benefits, there are a number of options open to you. The main purpose of a pension plan is to provide a regular ongoing monthly income for the rest of your life, and then for your partners life. Part of your fund (normally 25%) can be taken as a tax free lump sum, with the remainder of the fund used to purchase an Annuity, Third Way Plan, With-Profits Annuity or Draw Down Contract.
There are several varieties of annuities and drawdown plans for your use, according to the value of all of your pension plans when added together. For all of the following annuity types, you can normally include the following benefits –
Benefits
Spouse's pension
Indexation
5 or 10 year guarantee
However, choosing any of the above benefits has the effect of reducing the income paid out. You must also remember that you cannot cash in, or alter the annuity benefits in any way once purchased.
The income you receive from an annuity will depend on:
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The amount you have in all your pension funds when combined;
- Your age at the time you buy your annuity;
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Your gender (women tend to live longer than men and therefore receive lower annuity rates for a longer period);
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The rate offered by the insurance company when you come to purchase your annuity from them,
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and the type of annuity you choose, as follows –
- Single Life Annuity -
This plan pays a fixed annual income (on a monthly basis) for the person taking out the annuity. It ceases when that person dies, and cannot be transferred before or after death.
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Joint Life Annuity-
This plan pays a fixed annual income (paid monthly) for the person taking out the annuity, and an income to the spouse when the person taking out the annuity dies. The Spouse’s income can be 100%, two-thirds or half the original income.
Types of Annuity
Conventional Annuity
Conventional annuities provide a guaranteed income for life. The income is not subject to any investment or mortality risk, as it doesn’t matter what happens to stock markets, gilts, property, house prices or any other risk, and the income will continue to be paid out for the whole of your life, however long that may be.
Investment-Linked Annuity
With this type of annuity your funds are still invested in a range of gilts, cash, property and equities. Therefore your income can alter in the future either up or down, this also means that there is more risk than the Conventional Annuity.
With-Profit Annuity
A growing number of Providers now offer With-Profits annuities. Your money would be invested in the With-Profits fund which is normally made up of 80% in cash and gilts and the remainder invested in equities, you would have the benefit a smoothing effect as the Provider each year adds a reversionary bonus to your fund. At the beginning of the plan you would also choose an ABR (Assumed Bonus Rate) which would have the effect of a possible higher monthly income level than a Conventional Annuity would provide.
Enhanced Annuity
Most Providers now offer this type of annuity which is currently available to the following people –
Blue Collar Workers
The Obese
Smokers
Diabetes sufferers
Because of the effects on health you may be able to obtain a slightly higher income.
Impaired Life Annuity
A number of providers offer this type of annuity. These provide a higher than normal annuity income for clients with a life expectancy that is below average. The client has to give full details of their health and the proposal will be underwritten. As a result of the underwriting, the office may offer an increased annuity income. The increase will depend on the degree of impairment and is individually calculated.
Example:
Mr O of Shropshire had a pension fund value of &163,827 after Tax Free Cash. He is aged 71 and married, his wife is aged 69. Because of past ill health the client wanted a safe and secure ongoing income. He also wanted to include a 10 year Guarantee and a pension for his wife on his death of 2/3rd (66%) of his annuity income.
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Amount of Pension Fund after tax free cash was taken
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Income offered by his existing pension provider
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Best income offered after sourcing the whole of market for a standard rate annuity
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The best income obtained from a specialist annuity provider
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£163,827
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£10,500 p.a. or
£875 per month
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£12,180 p.a. or
£1,015 per month
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£14,001 p.a. or
£1,166 per month
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The figures in this table assume no increases in the level of annuity payable. The figures assume that the pension annuity payments are paid monthly in arrears and are guaranteed for a minimum of 10 years or the life of the client if longer. The figures also include a pension of 66% of the initial income for the client’s wife. All figures are quoted gross before the deduction of any income tax. All figures correct as of the 22nd November 2008.
Income Drawdown
This is a popular alternative to buying a lifetime annuity. The plan will allow you to take the maximum tax free cash while leaving the remainder of the fund invested to produce future growth. The amount of income can be varied and has a minimum income of £Nil for those who only want access to the tax free cash up to a maximum of HMRC’s GAD Rate Tables, which equates to 120% of the income a single life annuity would provide. On the death of the individual, the surviving spouse or partner would have a number of options such as, a return of the whole fund less a 35% tax charge or, carry on receiving the income or, use the fund to purchase their own lifetime annuity. Please bear in mind that the minimum fund value used to purchase a Drawdown Contract would need to be at least £100,000. By age 75 the individual or surviving spouse/partner must either purchase a Lifetime Annuity or arrange an Alternatively Secured Pension Plan. This type of contract will have the income reviewed after 5 years, which means your monthly income could increase or decrease for the next 5 years.
Example:
Mr A of Shropshire had a pension fund of £123,875 after Tax Free Cash was taken. He is aged 65 and married, his wife is aged 50. The client wanted the maximum income available and did not want to buy an annuity, so that on his death (if before age 75) the whole value of the fund would be transferred to his wife, for her to purchase an annuity.
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Amount of pension fund after tax free cash taken |
Income offered by his existing pension providers |
Best income offered after sourcing the whole of the market for a standard rate annuity |
Best maximum income that was obtained from a pension provider offering a drawdown contract
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£123,875
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£8,265 p.a. or
£688 per month
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£7,572 p.a. or
£631 per month
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£9,690 p.a. or
£807 per month
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The figures in this table show the maximum income that could be obtained. It is important to bare in mind that taking the maximum income on a continue basis will erode the fun. If the client should die before the age of 75 the fund will be transferred to his wife to provide her with an income. It is also important to note that the client must either arrange an ASP contract or an annuity at the age of 75. The figures show income paid gross and are correct as at the 26th August 2008.
Third Way Plan
This type of plan is based on a combination of Draw Down and Annuity rules. Quite often a higher monthly income can be achieved with a Third Way Plan. Like a Draw Down Plan every five years the income has to be re-valued in line with the GAD Tables used by HMRC and the ongoing income could therefore change, and is then fixed for the next 5 year period. At the age of 75 a guaranteed lump sum is returned to the owner of the plan, or to the partner if a death has occurred, which must then be use to purchase an Annuity or an Unsecured Pension. Many people tend to prefer this type of plan because of the higher income and because they can defer buying an Annuity, in the hope that Annuity rates might rise by the time they reach the age of 75.
Example:
Mr B of Shropshire has a fund of £43,413 after Tax Free Cash is taken. He is aged 61 and married, his wife is aged 59. He is still working full time but has decided to arrange his annuity income plan before he retires. The client wanted maximum income and a guaranteed amount available at his 75th birthday to use for the purchase of an annuity. The client does not want to buy an annuity at the moment; because he is hoping that annuity rates will improve over the next few years.
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Amount of pension fund after tax free cash has been taken |
Best income found after researching the whole market
for a standard rate annuity
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Best income that could be obtained from a 3rd way pension provider
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£43,413
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£2,616 p.a. or
£218 per month
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£3,125 p.a. or
£260 per month
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The figures in this table show the maximum income that could be obtained when arranging a 3rd Way Plan. It is important to bear in mind that an Annuity will have to be purchased when the client reaches the age of 75, and that he will have a smaller amount of money available to purchase his annuity at that time. However, this suited the client as he did not want to purchase an annuity at this moment. The figures show the amount of income paid gross and are correct as at the 4th March 2009.
Phased Retirement
Very similar to Income Drawdown contract except that the fund is divided into segments, normally 1000 segments, although could be 10,000 segments, which you are then able to crystallize a number of segments to provide the income or tax free cash that you may require each year, the income being used to buy a short term annuity.
Tax Free Cash and Income Questions
How much could I receive?
Since A-Day (April 2006) the maximum tax free cash available from most pension funds is 25% of the fund value, which includes ‘Protected Rights and Non-Protected Rights’ (providing you are aged 60 or over). However, with some plans, particularly Final Salary Schemes they may be a right to take a higher Tax Free Cash amount.
How much income could I receive?
This depends on a number of factors including size of fund and your objectives. For instance you could include a 10 year guarantee which means that on your death your spouse/partner continues to receive the full pension for the remainder of the guarantee. You may also want to include a 33% or 50% or 100% spouse’s benefit, so that on your death they would receive an ongoing income for the rest of their life. You might also want your monthly income to rise each year, so you would include indexation at say 3%. Please bear in mind that for every benefit you add to your annuity you would reduce the initial income.
When can I benefit?
At the moment anyone can arrange to take their pension income from the age of 50. However, in April 2010 the earliest you will be permitted to take a pension income will be increased to age 55.
Do I have to retire to take my benefits?
No – you can continue to work for however long you want as there is no need to retire just so that you can take your pension benefits. However, it is not usually possible to take benefits early from your Employers Pension Scheme as this will normally incur penalties.
How does it work?
Pension Plans and Schemes can be extremely complicated to understand. Therefore, full details of your existing pension arrangements need to be obtained by our Advisors. This may well mean transferring the agency to our Company so that the Provider will then release the information we will need.
We also need to obtain a full and detailed understanding of your personal objectives and circumstances, before explaining the options available to you. In addition we would also need to explain any potential disadvantages and/or penalties that would apply to you.
Having assessed your situation and taking into account all of the relevant facts and your needs we would then be in a position to make a suitable recommendation to you.
How long does it take?
This depends on two factors. The first is how quickly we can obtain up to date information from your Pension Provider, in addition to how quickly they release your funds to the new Provider if you decide to proceed. Secondly, is how quickly you return the relevant forms to us for processing.
NOTE – once purchased an annuity cannot be changed or surrendered for any reason.
How to Apply
If you would like to discuss your requirements in more detail please complete the enquiry form on our website or call or email us for a free no obligation chat.
When searching for the best annuity we always research the whole market. The amount of pension income provided by an annuity, whether level or indexed will usually be determined by the size of your total funds, your age and any benefits such as 5 year guarantee or, 10 year guarantee or, any spouses benefit that you want to be included. Additionally, enhanced annuities are available to those with certain work history or health problems, particularly if you have had to retire early through ill health. If your combined pension funds are large enough there is also the possibility of arranging a drawdown contract or a phased retirement plan. Unlike an annuity which, once purchased cannot normally be changed or altered. A drawdown or phased contract gives more flexibility in so much that no 5 or 10 year guarantees or spouses benefit have to be built in as the fund passes to the widow/er on your death if before the age of 75. This results in a higher monthly or yearly income being obtained. There can also be tax advantages to this type of plan. We can also arrange phased retirement for those of you who want the tax free cash but no income or, income but no tax free cash. Please also remember that you do not have to wait until the age of 65 to arrange your pension income (unless you are in a group scheme). Most pension plans allow you to take income from the age of 50 and you can still continue to work if you want however, in April 2010 the Government will change the earliest retirement to 55! Please bear in mind that for us to arrange a drawdown or phased retirement plan you would need to have at least £150,000 in your combined pension plans.
If you would like to find out more please call us for a free no obligation chat, or complete the online enquiry form.
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