As you approach retirement, thoughts turn to how to take an income from your pension funds. There are many options available and thanks to sweeping changes to pensions rules in April 2006 investors now have increased flexibility at retirement.
However, buying retirement schemes is not to be done without serious reflection. Lots of factors need to be taken into consideration such as, how much income do you need? What level of risk should you take? How best to provide for your dependants?
It’s really worthwhile to discuss these questions with an Independent Financial Adviser (IFA). An IFA will consider your individual circumstances and might recommend, for instance, that instead of going for a traditional annuity, you consider a different type of retirement scheme.
The earliest you can take retirement benefits is from age 55. The traditional option is to set up a lifetime annuity, which pays a secure income for life. This option remains the choice of many but still requires careful placement to ensure the inherent choices of such are correct for your circumstances. Rates also vary considerably across the market.
Alternatives to purchasing an annuity can be higher risk and can be more expensive, but are able to offer far more flexibility and also offer the possibility of much greater protection for your dependants than a traditional annuity.
The various retirement options include:-
Lifetime Annuity provides a secure, taxable income which is payable for the rest of your lifetime. Once set up an annuity can’t normally be changed, so you can rest secure in the knowledge that your annuity income will be safe.
Investment Linked Annuity
Investment Linked Annuity designed to give you the opportunity to obtain an income that increases during your retirement. Unlike conventional annuities, these are linked to an underlying investment fund so they contain an element of risk.
Unsecured Pension (Income Drawdown)
Unsecured Pension (Income Drawdown) is a flexible option which may be a consideration for more substantial funds, or if you have other sources of income. Income Drawdown allows you to take a taxable income directly from your fund, leaving the remainder invested. It is available up to age 75. Offers greater death benefit options than a traditional annuity.
Phased Retirement is an alternative option to converting the entire pension fund into an annuity all in one go, Phased Retirement allows you to take the benefits of your pension gradually over time, either by setting up an annuity or by moving more money into Income Drawdown. Offers greater death benefit options than a traditional annuity.
Alternatively Secured Pension
Alternatively Secured Pension (from age 75) is an option introduced in April 2006. Prior to this a pension fund had to be converted into an annuity by the age of 75. Alternatively Secured Pension (ASP) works like Income Drawdown, but for people aged 75 and over. If you don’t want to go into ASP you must buy an annuity by age 75.
On retirement you will normally be given the option of taking a tax free lump sum which you can spend or save as you wish. Tax free cash is, as the name suggests, totally tax free. You can normally take up to 25% of your pension as tax free cash (this must be done before age 75). Tax free cash is also known as ‘Pension Commencement Lump Sum’ and since April 2006, 25% tax free cash is potentially available on most pensions including those where it was not traditionally allowed, such as AVC’s and Protected Rights funds.
Choosing the right mix of retirement schemes is not simple, particularly when there are so many products, providers and options available.
An Independent Financial Adviser (IFA) can help establish which type of scheme is right for you and what level of risk you should take with such. An IFA can deal with all product providers on the market and will recommend the most suitable product for you.
Optimum Independent Financial Advisers can advise on all types of retirement schemes. Please use our online contact form or other contact details if you would like to discuss your retirement options with an adviser.