At Retirement Pensions
Retirement can last for over 30 years and can depend on a range aspects such as when you retire and how long you live. Many of us are living longer and it is becoming more likely that you will be retired for a long time. For this reason, it is important to ensure you have enough income to not worry about how to pay the bills.
You may be planning to retire fully, or gradually; however, you now have more choice and flexibility in how you and your family receive income in retirement.
Few of us know how long we’re going to live and therefore estimating how long your retirement will be is a difficult task. It is important to bear this in mind when deciding what to do with your retirement savings.
Your priority maybe to make provisions for any family or dependants you have so that they receive an income and/or inherit any unused money from your pension pot when you die.
From the age of 55, you have the freedom to use your pension money. So, what are your options?
Buy an Income for Life/Secure Income
Secure income is any regular income that is guaranteed for life such as:
- your State Pension
- a pension from a defined benefit scheme (see pensions)
- income from a lifetime annuity
You can use money in your pension fund to buy a lifetime annuity. This provides an income that will be paid to you for the rest of your life. Most annuities are low-risk options, as your income is guaranteed – it can’t go down – and doesn’t directly rely on investment returns.
You don’t have to buy an annuity from your pension provider. Different providers may offer different types of annuity, and the amount of money you get will vary depending on which provider you buy from.
With a lifetime annuity, you have a range of options to choose from, that take your personal needs into account. These include:
- Escalating income/Inflation-proof income – You can arrange for the income you receive to increase over time by a fixed percentage or alternatively your pension could increase in line with inflation each year for the rest of your life.
- Guaranteed period – Your annuity provider can pay an income to your dependent for a period after your death.
- Value protection – You can protect part or all of the funds you used to buy the annuity. If you die before this amount has been paid to you, the difference will be paid to your Estate or dependants.
It is important to understand, the more options you add, the lower your retirement income will be.
There are other types of annuities available where your income can vary:
- Investment linked annuities -Your pension goes into investments such as stocks and Shares/equities, giving your retirement income the potential to grow, although the income you get could go down as well as up.
- With Profits annuities – Your pension is invested in a company’s With Profit fund and gives your retirement income the potential to grow, although the income you receive is not guaranteed and could go down as well as up.
- Fixed term annuities – Instead of buying a guaranteed income for life, you can use money from your pension funds to buy a retirement income for a set number of years.
Once you buy an annuity you can’t generally change it or cash it in, even if your personal circumstances change.
Flexible income/Income drawdown
Flexible income is income you get but the amount may vary and it’s not guaranteed to last for the whole of your retirement. This includes income from:
- an income drawdown pension
- savings and investments
- renting out a room in your home or income from rental property you own
The option of using your pension money can be useful. You may choose to just take money from your defined contribution pension, whenever you need to, from the age of 55 (a income drawdown pension). You can do this in a few ways, with different tax implications for each.
Income drawdown allows you to take 25% of your pension tax-free as either one lump sum or in instalments dependant on your requirements. It’s up to you, however you will need to consider other potential income sources.
Every time you take tax free cash, three times what you take will be moved into the drawdown part of your pension. It stays invested, as does the rest of your pension.
You can take money from the drawdown part of your pension whenever you want, but the amount you take will be taxable.
Uncrystallised funds pension lump sum (UFPLS)
UFPLS gives you the option to take cash lump sums from your pension whenever you need to. Each time you take money out, 25% will be tax free, and 75% will be taxable. What you do not take stays invested in your pension. It gives you the flexibility to withdraw money part tax free, part taxable.
Deciding the best way to access funds is key to retirement. A good place to start is by working out what income you’ve got and how much you will need.
You can carry on taking money from your pension until your fund runs out, but you need to make sure that you have enough money left for the rest of your retirement.
If your funds remain invested they still have the potential to go down or up in value and you may get back less than the amount you invested. A sustained drop in the value of the investment
means that you will have less money from which to take an income.
Tax rules and your personal circumstances may change in the future which you should keep in mind when making your pension income decisions now.
Your annual allowance changes to money purchase annual allowance, (MPAA) once taxable income is taken. If you’re still paying into your pension – or think you might do – think carefully before you take anything other than your tax-free cash out of it.
Any funds left when you die under income drawdown can be passed to your beneficiaries, who will be able to choose how to take the remaining capital.