Retirement Options

When you retire, you can usually take 25% of your pension fund as a tax free lump sum. The remainder of the fund must be used to provide you with an income which is subject to income tax. You can do this in various ways, for example using annuities or unsecured pension options.

Since April 2006 retirement has become much more flexible than in the past. You have more options; for example, you can:

• Take free cash but defer payment of income.
• Delay buying an annuity.
• Receive an income but continue to work.

Lifetime Annuities

Most people will buy a Lifetime Annuity with their pension funds after receiving tax free cash. A Lifetime Annuity secures a regular income for the rest of your life.

The older you are when you buy an annuity, the higher the income you get at the start. This is because, on average, an older person has fewer years left to live than a younger person. But take care if you are thinking of delaying buying your annuity to get a higher rate - rates have been falling with increased life expectancy and you will enjoy the income stream over a shorter period.

Lifetime Annuities can be single life or joint life. Unless there is a guarantee, a single-life annuity will only pay out during your own lifetime. A joint life annuity continues to pay an income to your partner after your death. Joint life annuities are more expensive than single life annuities because the insurance company will expect to continue paying the annuity for longer.

A level Lifetime Annuity pays the same income year after year for the rest of your life. To protect your income from rising prices, you can choose an escalating Lifetime Annuity which pays a lower initial amount but then increase each year.

If you die shortly after buying an annuity, it will not have paid out much. To guard against this, you can choose an annuity with a guarantee period. Guarantee periods are usually for five years worth of income, even if you die within this period.

Some companies offer annuities that pay you an enhanced income if you have a health problem that threatens to reduce your lifespan. These are called 'impaired life annuities'. Relevant health problems might include, for example, cancer, chronic asthma, diabetes, heart attack, high blood pressure, kidney failure, multiple sclerosis or stroke. You might be able to get an enhanced annuity if you are overweight or smoke regularly.

Investment linked annuities put your pension fund into investments, such as stocks and shares. This means that you could continue to benefit from stock market investments after retirement, but there is also the risk that the value of your investment could fall.

Unsecured Pension

One of the major drawbacks with annuities is that they are inflexible. Once you have brought an annuity you cannot change the format - even if your circumstances change. If you die shortly after buying an annuity you would have received poor value.

Using income withdrawal, you can take a taxable income direct from your pension fund (this is also known as income drawdown.) The principal advantages are:

• You remain actively invested and benefit from long term investment growth (though the reverse also applies).
• In the event of your early death, all remaining assets are available to provide benefits to your dependants.

HM Revenue & Customs sets a limit on the maximum amount of income you can take from the fund. You must review your arrangement every five years to make sure it is within this limit. There is no minimum amount of income that must be taken. You will normally have to buy an annuity at age 75.

These options involve extra costs and extra investment risk when compared with buying a Lifetime Annuity straight away. They are not usually suitable if you have a small pension fund (after taking any lump sum), or you have no other assets to fall back on.

However, the additional flexibility in income levels and the prospect of future investment growth will be attractive to many.

Whether you intend to secure retirement income through annuity purchase or income withdrawal we can help. Contact us and we will help you find the best solution for your circumstances.