How should you take your retirement Income?
When it is time to take your retirement income you have some decisions to make as to the type of retirement income you choose. The majority of people think that they have to buy an Annuity when they retire, but this is not the case. We like to give people all the information on their options, in order that you can make the most informed decision possible. Conventional Annuity The most popular way to take your retirement income is to purchase an |
 |
If you opt for a 5 year guarantee, this means you are guaranteed to be paid this income for the 5 years even if you die. However after the 5 years if you haven't opted for a spouses pension, your annuity will stop, and your fund will be used to pay other people's annuities.
You really need to get some advice as to the options you require, for example do you need a 5 year gaurantee if you are adding the feature of a 2/3 spouses pension.
With Profit Annuity
A With Profit Annuity is guaranteed to pay you an income for the rest of your life the same as a conventional annuity. You can also add the same additional features as with a conventional annuity. So what is the difference?
A With Profit Annuity will carry on being invested in the annuity providers With Profit Fund, this means that you can choose a starting income that is typically higher than the income you can get from a conventional annuity, via the selection of a higher bonus rate. However to sustain this higher income in retirement your With Profit Investment must achieve a return over the bonus rate you selected at retirement. As long as the With Profit Fund achieves this rate your income will not fall and in fact if the return is higher than your bonus rate selected then your income can increase in the future.
However if your fund does not achieve the bonus rate selected this could mean your income falling in the future. This type of annuity is not suited to those who cannot risk their income falling, it is suited to those who have other income to fall back on and want to try and get the best income they can.
Unit Linked Annuity
This type of annuity is very similar to a With Profit Annuity. Your fund is invested in unit linked investment funds, and your income can increase and decrease depending on the performance of your underlying investment funds chosen.
It is more risky than a With Profit Annuity if you choose high risk funds, and doesn't have the same features as a With Profit Fund, that can smooth the returns you receive to protect you against any large stock market falls. You should seek professional advice on this option, as it is important that you have an expert put together a diversified portfolio for you, to spread the risk that you are taking.
Income Drawdown
Income Drawdown is a more specialised retirement option and should only be considered by those who have a fund value of over £100,000 or income available from other sources.
The way it works is as follows. Your pension fund continues to be invested as if you have not retired, your fund stays within your pension plan and still benefits from tax free growth. You can then choose to take an income from the fund which is set at a maximum and minimum figure depending on your age and sex. The figures are determined by the Government Actuary Dept and are referred to as GAD figures.
Typically you will find that the income you can take via Income Drawdown will be higher than the income you will receive if you just purchased a conventional annuity with some added features.
You can still take your tax free cash upfront like you can with an annuity. Then the rest of your fund remains invested. When you first go into income drawdown you will be given a critical yield figure, this figure is the one that your fund must continue to grow by each year in order to maintain the fund, so that you will be no worse off than if you had purchased a conventional annuity.
The major advantages of Income Drawdown over annuity purchase are;
- If you die during Income Drawdown your fund value left in your pension will be passed to your family or estate less a tax charge of 35%.
- If investments perform well your fund could buy you a better annuity income as you get older.
- If you are going to retire early for example at age 55, annuity rates will be very low, by going into drawdown you can defer buying your annuity indefinately, but still drawdown some income.
However you must be aware of the risks involved. If your fund performs badly your income when you eventually purchase an annuity might be worse than if you had purchased an annuity at retirement. Also annuity rates might have gone down resulting in a lower annuity.
You must seek advice from an Independent Financial Adviser on this option due to the risks involved. There are advisers who specialise in this area, and you should look to use an IFA who has sat the qualifications K10 and K20 to make sure they have the knowledge to advise you.
Phased Drawdown
Phased Drawdown can be used if you are happy not to take your tax free cash upfront as a lump sum. Instead you use your tax free cash to supplement your income you take each year. So everytime you take an income payment from your plan a proportion of it will be tax free cash the rest will be income that is taxable. The advantage of this option over income drawdown is a reduction in your tax bill. The other important difference is that if you die the whole of your fund that hasn't been used to pay your income, will be paid to your spouse or estate completely tax free, whereas under income drawdown the remainder of the fund is passed on at a tax charge of 35%.
