18 Sep 2014

Options at Retirement

Options at Retirement

Neil Aspinall, Independent Financial Advisor, gives some insight into why it is important to receive Independent Financial Advice when taking money from Pensions.

Neil Aspinall, Independent Financial Advisor, gives some insight into why it is important to receive Independent Financial Advice when taking money from Pensions.

When it finally comes to having the chance to wind down, relax and retire from working life, it might be the time to start taking an income or capital from your pension investments.

Essentially you have the following main options when taking income/capital from pension investments:

  • You may leave your existing pension fund with your current provider.  Then, if you wish, take a tax free cash sum (known as a Pension Commencement Lump Sum) and utilise your current provider’s annuity rates to purchase a conventional Lifetime Annuity (Compulsory Purchase Annuity), which guarantees a lifetime income;
  • You may exercise a transfer of the whole value of your pension fund to another provider which currently offers the best annuity rate for a Lifetime Annuity (known as exercising the Open Market Option);
  • You may use the whole of your pension fund after any tax free cash has been paid to purchase a Lifetime Annuity on a 'with-profits' basis with your existing or another provider;
  • You may use the whole of your pension fund after any tax free cash has been paid to purchase a Lifetime Annuity on a unit linked basis with your existing or another provider;
  • You may transfer your pension fund to a provider offering a Lifetime Annuity on a flexible basis (often called variable or third way annuities). These types of annuity attempt to combine the certainty of a conventional lifetime annuity with the prospect of investment growth seen with Drawdown Pension.
  • You may transfer your pension fund to a provider offering a Scheme Pension (usually only available with Defined Benefit pension schemes). This allows for income levels to be actuarially determined based on your personal circumstances;
  • You may transfer the whole value of your pension fund into a Drawdown Pension.  This allows you to vary future income levels to fit in with your overall financial plan, either by use of drawdown pension (on either a capped or flexible basis) or short term annuity purchase;
  • You may convert your retirement fund in stages, over a number of years (often referred to as staggered vesting or phased retirement), into income using either Secured or Drawdown Pension. This may be available with your current pension arrangement or may mean transferring into a Personal Pension Plan or Self Invested Personal Pension;
  • If you take your tax free lump sum before 6th April 2015 the government has put in place temporary rules that mean you have until 5th October 2015 to decide how you wish to access the rest of your pension fund. You may leave the remainder of your pension fund with your current provider or transfer to a different provider. The balance of the fund can be taken by any of the means described above or after 6th April 2015 as a taxed lump sum; or
  • You may use the value of your pension fund to utilise a combination of the above options.

If you meet these certain conditions, it may be possible for you to take all your benefits as a lump sum (known as a trivial commutation lump sum). The following requirements are: 

  • The value of all your pension rights from all registered pension scheme sources (including the value of existing pensions in payment) must be £30,000 or less;
  • You are aged 60 or above;
  • You have some unused lifetime allowance left;
  • The payment eliminates your rights under the scheme in question; and
  • The payment is made within 12 months of your first trivial commutation lump sum being paid (if applicable and not including any trivial payments paid before 6th April 2006).

In addition to the above, if you are aged over 60 and have any small non-occupational pension pots, such as personal pensions, stakeholder pensions or retirement annuities, with values of £10,000 or less each, you may be able to take up to three of those as lump sums. This is irrespective of the value of your overall pension benefits.

If you have not previously taken benefits from the scheme paying the lump sum, only 75% of the lump sum will be taxable (as pension income). The other 25% will be paid tax free. If the lump sum is being paid from pension savings that you have already put into payment the whole lump sum will be taxable as pension income.

Changes to taking benefits from pension plans (not including final salary schemes) 

From next April (2015) the UK Government is proposing that there will be no restrictions on people’s ability to draw down from their defined contribution pension pots after age 55. The tax rules will be drastically simplified to give people unfettered, flexible access to their pension savings.

Apart from the tax free cash element of the pension fund (usually 25%) any funds withdrawn will be taxed as income at the individual’s marginal rate(s) of income tax.

When the new system is in place, the government will not prescribe a particular product which people are required to purchase or invest in when accessing their savings. It will be up to individuals to decide how they want to access them, either as a lump sum or through some sort of financial product.

Those who want greater control over their finances in the short term will be able to extract all their pension savings in one go, and invest/spend them as they see fit. This flexibility will be particularly beneficial for those with a relatively small amount of overall defined contribution pension savings for whom buying an annuity or purchasing a draw-down product would not be in their interests.

If you want to continue to want the security of an annuity will be able to purchase one, either at the point of retirement, or at a later stage. This may be with either some or all of their defined contribution pension pot.

Alternatively if you would prefer to keep their savings invested and access them over time will be able to purchase a draw-down product. However, unlike the current system, there will be no limits on the amount someone can withdraw from their draw-down arrangement each year, and there will be no minimum income requirement which people have to satisfy in order to withdraw from their pension.

The introduction of more choice for pension savers with some form of defined contribution savings presents an opportunity for providers of retirement income products to innovate and create products and processes which better meet the evolving needs of consumers.

As you can see this area is full of many choices and choosing the right option for you and your own circumstances is extremely important.  If the wrong option is taken it could prove very costly in the long run so taking expert professional advice is essential.

Neil Aspinall, Independent Financial Advisor

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