Deciding how to receive the money you have saved into your pension funds over your career is one of the most important financial decisions you will have to make.
Since the pension reforms came into play in April 2015, a number of flexible options have become popular as many people are choosing not to commit straight away to a lifetime annuity, now that they no longer have to.
For those looking for a retirement income product that will allow you to access your tax-free cash now, whilst deferring your decision to commit to a lifetime annuity, there are two main type of products you may wish to consider:
These two products are explained below, together with a ‘benefits and drawbacks’ table to compare them together. Of course, for more in-depth information on these or any other retirement income products then you might wish to seek the assistance of a specialist in retirement income.
Fixed-term annuities are relatively new and share some of the characteristics of both lifetime annuities and drawdown.
When you retire, if you are unwilling to commit to a lifetime annuity, you could consider a fixed term annuity which pays you a regular income for a set period of time. You can choose the amount of income you receive and can specify your preferred term between one and twenty-five years. By taking the payments spread over a several tax years, it can be potentially more tax efficient than if taken as one lump sum.
At the end of your fixed period, you will receive a guaranteed lump sum of money, often referred to as your ‘guaranteed maturity amount or value’. At this point you decide on your future choice of retirement income product (such as another fixed term annuity, or a lifetime annuity), or you may choose to take your remaining fund as cash.
This product may be a good option for you if you expect annuity rates to improve or because you feel you might qualify for an enhanced annuity in the future.
If you are looking to take an income and not be limited by annuity rates at all, you may want to consider Flexi-Access Drawdown (also known as just ‘drawdown’). This allows you to keep your funds invested, where you will be able to draw any amount over the period you choose.
Assuming your funds last long enough (which of course they may not) then you can remain with this one product for the remainder of your life if choose to.
Generally speaking, you will be able to take 25% of the fund as a tax free lump sum when you designate new funds for drawdown and any income drawn is then taxable as pension income. You need to be comfortable with investment risk and that the value of your fund (and therefore future income) may go down.
|Fixed-term Annuities||Flexi-Access Drawdown|
|Take up to 25% tax-free cash – no opportunity to take further tax-free cash after this point.||Take up to 25% tax-free cash – defer some if you wish.|
|Offers a regular income for a set amount of time, allowing you to budget.||Pay yourself an income of any amount whenever you wish.|
|Returns a known guaranteed maturity sum at the end of the chosen term, which can be re-invested into another fixed term annuity, any other type of retirement product, or taken as cash.||Keep your fund invested, with the potential to keep on growing.|
|Potentially benefit from increased annuity rates at the end of the fixed term as you will be older and with the possibility of qualifying for an enhanced annuity.||Buy an annuity in the future should annuity rates sufficiently improve or you qualify for an enhanced annuity on attractive terms.|
|Annuity rates may be lower in the future meaning the guaranteed maturity sum may not be adequate to provide a similar level of income that a conventional annuity would pay, if purchased today.||Your fund is invested and subject to uncertain investment return, so is a high risk option as your income is not secure. The value of your fund can fall and at worst, your income can run out.|
|Once selected at outset, benefits cannot be changed during the plan term.||High income withdrawals or poor investment returns could eliminate your fund.|
|The higher the income selected at outset, the lower the guaranteed maturity sum will be at the end of the term. This in turn will reduce the future level of income you can obtain.||You can pass on the value of your fund to your loved ones when you die, usually free from inheritance tax.|
When it comes to finding out which retirement income options could meet your current and future needs, speaking to a specialist in retirement income is essential. Call 0800 652 1316 to discuss your options and to receive your FREE retirement options report, including quotations from the UK’s leading annuity providers .
Retirement Line work on a non-advised basis.Ifyou are at all unsure of which options suit you, you should seekregulated advice. Ifyoulike,Retirement Line can introduceyoutoan independent financialadviser.