Retirement Income Options

From age 55 your DC pension fund is accessible whenever you want it, but just because it is available doesn’t mean you should draw benefits immediately. You can wait until it is in your best interest to start drawing benefits and in the meantime, your savings can remain within the tax efficient pension wrapper. You could also make additional contributions to your pension fund during this time to establish a potentially larger fund in the future.

It is possible to take your entire pension pot as a single payment and most schemes will allow this. The first 25% you take will normally be tax-free and the remainder will be added to your income and taxed at your marginal rate. Be aware that this may result in you entering a higher tax bracket. Cashing in a pension fund may be appealing for some but it is important to consider how you are going to fund your retirement going forward.

Taking money simply because you can when you don’t need it immediately is questionable. Why would you take money out of the tax efficient wrapper of a pension and simply put it in a taxable savings account or a less favourable inheritance tax situation? These are questions that you should consider before you make these important decisions.

You can find out more about our cash drawdown service in our Cash Drawdown Brochure.

An annuity is an insurance policy which pays a guaranteed income for the rest of your life. The rate is fixed at the time the annuity is purchased. The amount of pension you receive will be based on your individual circumstances such as:

• The size of the pension fund you use to buy the annuity
• Your age
• Interest rates at the time of purchase
• Your health / lifestyle
• The options you select
• Your postcode (on the basis that people in certain areas have been shown to live longer than people in other areas)

Once the annuity has been purchased, it will usually not be possible to change its terms. In the event of death, there is no return of the remaining pension fund unless a protection option has been selected. However, there are a number of variations on the type of annuity offered.

Other types of annuities:

Enhanced annuity – pays a higher income to an individual if aspects of their lifestyle, such as smoking, drinking alcohol, weight or medical history may shorten life expectancy.

Impaired life annuity – pays a higher income than a standard annuity for those who have significantly lower life expectancy due to an existing medical condition.

Investment linked annuity – similar to a conventional lifetime annuity, but instead of the income being fixed, it is linked to the return on the underlying investments e.g. a ‘with profits’ fund.

We can provide guidance and advice on annuities which includes products from the whole market. For more information, please contact us.

You can choose to phase your annuity purchases by exchanging a proportion of the pension fund for an annuity and a proportion of the available tax-free lump sum on a regular (usually Annual) basis. This is known as ‘phased retirement’.

Phased retirement can be very attractive for individuals who have a more substantial pension fund. It provides wider choice and enables you, if required, to take a combination of tax-free lump sum and annuity payments, thereby reducing your income tax liability. By phasing retirement, it is possible to increase the guaranteed income received each year to suit your changing lifestyle and personal circumstances as you are able to consider different types of annuities each year.

On death before the age of 75, part, or all, of the remaining fund, which has not already been used to purchase a series of annuities, can be available as a lump sum to chosen beneficiaries.

Income drawdown is a popular alternative to buying an annuity and since the pension freedoms, it is also known as ‘flexi-access drawdown’. It allows you to draw an income from your pension fund while the fund remains invested.  This means that the capital value of the fund does fluctuate, down as well as up, as it is subject to investment risk.

You can take part of your pension fund as a tax-free lump sum, the maximum being 25% of your fund value (unless you have protected pre-6 April 2006 entitlement in excess of 25%). You can then withdraw any amount, over whatever period you choose from the remaining fund (which stays invested). The income is subject to income tax but the remaining part of your invested pension fund continues to enjoy the favourable tax environment offered by pension schemes.

If you regularly make withdrawals which are greater than the investment returns generated by the pension fund, you will find that your fund falls in value, which may mean you have to accept a lower income in future or face the risk of running out of money.

You also have the option of choosing ‘phased income drawdown’ which is similar to the phased retirement route referred to in the annuity section above, where payment is a mixture of tax-free lump sums and income. However, instead of purchasing a series of annuities on a regular basis, income is drawn from the fund, whilst leaving the balance of the fund invested. This can produce greater tax efficiency in the provision of a regular income.

The choice of which route to take could be dictated by whether there is a need or wish for the tax-free lump sum to be paid in its entirety at outset, coupled with HMRC tax treatment of the death benefits arising before the age of 75.

Phased income drawdown allows you to choose when and how to take the proceeds of your pension plan to best suit your circumstances. Your pension fund remains invested and gives you the opportunity to manage the tax that you have to pay by controlling the level of income you receive each year.

When you are deciding on how to fund your retirement, you are not restricted to choosing just one option; it is possible to use a combination of retirement income options.

Each option has a specific purpose and a combination may be appropriate to address your requirements, whilst minimising your income tax or securing money for your beneficiaries.

It is important to make the right choice for your retirement income, one that is appropriate to you, your individual circumstances and tax position. Our regulated financial advice service will support you through the complexities of retirement income planning and offer expert guidance on annuities, drawdown or a combined approach to help you create a tax-efficient strategy to meet your objectives.