RETIREMENT INCOME OPTIONS

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In April 2015, new ‘Pension Freedom’ regulations came into force. The new changes show a big change in attitude by the government, in terms of placing trust in the individual. Previously the fear was that if everyone had unlimited access to their pension funds they might spend it all far too quickly and then rely on the state to help them out. The government now say that if an individual has had the discipline to save for many years to provide a comfortable income for retirement for themselves, they would be very unlikely to want to jeopardise this by going on a spending spree. This is something I am sure we can all agree with, and the changes are welcome. The main options are summarised below…

  1. 1
    Guaranteed Annuity

    To many, this traditional way of taking retirement income will still be the most suitable method. You are effectively buying a guaranteed income from the provider in return for giving up your pension fund. There is no investment risk to your own income (or your spouses income if chosen) for as long as you live.

    The income can be level, or escalating once started. You receive the tax free lump sum, and then a guaranteed amount for as long as you live. An annuity must be arranged at the same time as taking the lump sum.

    Risks

    • Inflexibility. Once it is up and running, no changes can be made.
    • There is an inflation risk if a level annuity is chosen.
  2. 2
    Enhanced Annuity

    An enhanced annuity is just a Guaranteed Annuity but on special rates which have been determined by your health or lifestyle choices. There is no difference to how they work.

    Enhanced annuity rates can be up to 30% greater than normal rates so we ask almost all clients to complete a Health Questionnaire. Often enhanced rates can be achieved because of seemingly minor things like height to weight ratio, average alcohol consumption, regular medication and of course smoking habits so it is usually a worthwhile thing to do.

    The generic health questionnaire is then sent to eight enhanced annuity providers who will all then give individual decisions on what, if anything, they will offer.

  3. 3
    With Profit Annuity

    This type of plan does bare an investment risk, but historically not a great risk.

    After tax free cash the remaining fund is invested in a with profit fund, the returns of which determine whether the pension will stay the same, increase or decrease on the previous year.

    Although the initial level of income may be roughly the same as a traditional annuity, you can choose a higher starting level by taking into account some of the anticipated investment growth. If this investment growth is not achieved, income may fall.

    The returns from most with profit pensions have held up well though, even through the most turbulent times, and they can be suitable for those who want the opportunity for increasing income, despite this not being guaranteed.

    An annuity must be arranged at the same time as taking the lump sum.

    Main Benefits

    • You will be able to choose a starting level that is often higher than that of a traditional annuity.
    • The income may increase, dependent on fund performance.

    Risks

    • The level of pension is not guaranteed, so can go up or down annually.
    • Any future increases in life expectancy can be passed on to the annuity holder by decreasing future bonuses.
  4. 4
    Temporary Short Term Fixed Rate Annuities

    You are not committing to a long term annuity with this product, and you are not completely giving up your pension fund to the chosen provider. This product is often used when the tax free sum is required, but no income is needed for a set number of years.

    You can take some or all of the available Tax Free Cash, and then choose the level of income you want (which can be nil).

    The term of the plan is set at the beginning and can be as low as 3 years. Some products now allow break clauses if changes in health have occurred during the term for example. There is no investment risk with this product. You are promised a guaranteed fund value that is yours at the end of the term.

    If you are not taking any income of course, the fund value will be greater at the end of the term than it is now, though there may not be an appreciable difference due to the cost of the guarantees.

    At the end of the term you can use the Guaranteed Fund Value to purchase any pension income product, including another short term annuity if age permits.

    Main Benefits

    • You will not tie yourself into a low annuity rate which cannot be changed.
    • No investment risk. You know what your fund value will be at the end of the term.
    • All options are still open at the end of the term.
    • The plan holder may qualify for Enhanced Annuity rates at the end of the term, when previously they did not.

    Risks

    • Annuity rates may fall by the end of the term in which case the pension you could buy would be less.
    • You do not have any chance of investment gains improving the fund.
    • Some contracts allow you to leave early if for example income was now needed but was not initially chosen, but the fund value is recalculated and the previous guaranteed amount does not apply.
  5. 5
    Triviality rules and Small Pot rules (minimum age is now 55)

    Since Pension Freedom day, Triviality rules only apply to defined benefit schemes. If your total pension value from all plans comes to less than £30,000 the fund could be taken as a lump  sum; the first 25% would be tax free and the remainder would be taxed at the marginal rate.

    Additionally, under certain circumstances, up to 3 ‘small pots’ of less than £10,000 may also be taken in this way, regardless of the value in other pension pots. The small pots rules apply to both Defined Benefit and Defined Contribution schemes.

  6. 6
    Income Drawdown

    This is the most flexible option, but it also contains a higher level of risk as your pension fund remains invested. It is always very important therefore to ensure the pension fund is invested in line with your attitude to risk.

    Income is not paid to you through the purchase of an annuity. Instead the pension fund remains invested and you ‘drawdown’ an income (like a series of mini withdrawals) from the fund whenever you need it.

    The minimum income is nil, there is no maximum, and the income can be changed at any time.

    The main benefit is the flexibility. A traditional annuity for example cannot be stopped once started so if you found that you could have lived on a lower pension or none at all, there is no going back. With a pension in drawdown, you would simply stop the income.

    For those considering semi retirement Income Drawdown would enable you to take just what level of income you needed until full retirement was reached, when you could reassess your needs and change the income accordingly.

    Income Flexibility from April 6th 2015

    The biggest headline change is that restrictions relating to the level of income that can be taken, have now been removed. You are able to withdraw any level of income you want, at any time, and in effect you could empty the pot all in one go if that was your wish. This sounds attractive, and it is certainly very flexible, but there are obvious dangers…

    Three things to be careful of…

    1. Firstly, as now, any income taken is taxed at the client’s marginal rate for the tax year the income is taken, so care has to be taken not to pay more tax than is necessary.

    In nearly all cases emergency tax codes will be used for the initial payments, until HMRC issue the pension provider with a relevant tax code. This may well cause problems of ‘over taxation’.

    This can be rectified later but it can be a laborious process. Often it will be better to start to take a very small withdrawal (where any over taxation will be marginal) until the tax code is issued, but over payment of tax could still occur.

    2. Do not lose sight of the overriding purpose of why the pension pot is there, which will almost always be to provide a lifetime of income. Once the pot has gone, so has the income, therefore careful planning has to be undertaken to ensure that the fund lasts the course, and the final years of retirement are not spent in comparative poverty.

    3. When a pension pot is put into ‘flexi drawdown’ there could also be implications on the receipt of means tested benefits, and also on Long Term Care costs.

  7. 7
    Pension Death Benefits

    Income Drawdown plans

    There have also been major improvements in the tax position of income drawdown plans and also uncrystallised pension funds (those where no benefits have yet been taken) when the plan holder dies. These are the new rules…

    Death pre age 75

    The rate of tax that has to be paid by the beneficiaries of the remaining fund if the pensioner dies before age 75, has been reduced from 55%, to nil.

    You can nominate any beneficiary, they do not even have to be a relative.

    1. The fund can be paid to the beneficiary as a tax free lump sum and can be used for any purpose at all.

    2. The fund can be passed over within a pension fund where any income taken from the fund will be tax free. The beneficiary could buy an annuity with the pension fund and this would also be tax free.

    Death after age 75

    1. The fund can still be paid out as a lump sum, but it will be taxed at 45% in the tax year 2015/16. From April 6th 2016 the level of tax will reduce to the beneficiaries marginal rate.

    2. The fund can still be passed to beneficiaries within a pension fund but income will be taxed at the beneficiary’s own marginal rate.

    **These changes mean that pension funds can now be more easily ‘passed down the line’ to family, in a tax efficient manner. When a beneficiary dies, any remaining pension fund can also be passed down to further beneficiaries, and so on.

    Keeping the pension funds within a pension wrapper will generally increase their tax efficiency and will mean that they remain outside a persons estate for IHT purposes.

    Annuities

    Often annuities were criticised because there were many circumstances when the fund that had been accumulated was lost because of early death. This has now been addressed and pension funds can now be fully protected when an annuity is bought…

    Guarantee Periods

    Since April 6th 2015, providers can now offer Guarantee Periods of up to 20 years and sometimes more.

    The annuity is paid to the main annuitant for as long as they live. A Guarantee Period though can be purchased at the outset which will ensure the annuity continues to be paid in full for the remainder of the chosen period, if the annuitant dies early. For example, if the annuitant dies after 7 years, a 20 year guarantee will mean it continues to be paid in full to the spouse or beneficiary for the remaining 13 years.

    Spouses Pensions

    The annuity can be written so that of the annuitant dies, the remaining spouse continues to receive a percentage of the pension (50% for example) after the guarantee period ends.

    Value Protection

    An annuity written with Value Protection provides a guarantee that the full original fund will be returned to beneficiaries, minus all withdrawals taken, should the annuitant die early. This ensures that as a minimum, the whole value of the original fund will always be returned.

The need for professional advice is now more important than ever. There are options at retirement to suit all circumstances, but careful consideration is still needed when deciding the best route to take. Each option is worthy of deliberation and we will discuss the benefits of each before making a recommendation.

Our job is to offer a well informed and considered recommendation, that you feel is right for you and your family.

If you would like us to advise you on your retirement income choices, please contact us.

We’d be happy to help.

Financial Planning Products & Services

Here’s short descriptions of financial planning services offered complete with links to pages with greater content.

  1. Retirement Planning

    Retirement can seem a lifetime away especially when you’re young. It now seems more and more likely that we will have to rely on ourselves to provide the income we will need rather than the state, so it makes sense to start saving as soon possible.

    Our job is to make pensions simple for you. Simple to understand, and simple to appreciate.

    Building your pension savings

    Pensions are, of course, designed to enable you to save sufficient money to live comfortably after you have retired from work. We can show you how much your current plans will give you (if you have any), and then show you what you can do if it isn’t going to be enough. Simple!

    Read more…

  2. Retirement Income Options

    Start Planning Now!

    Within the last 5 years of your working life it is extremely important that you regularly review your pension arrangements.

    Firstly, have you enough money saved in your pension? You still have time to increase your payments or contribute single premiums to build up your fund and improve your pension, and of course benefit from the tax relief added to your plan.

    Secondly it is extremely important to make sure your money is invested with the degree of risk you are comfortable with. The nearer to retirement you are the more secure your investment strategy should be, as you don’t want the prospect of retirement spoilt by a sudden downturn in the stock markets.

    Find out more…

  3. Wealth Platform

    How can it help?

    The Wealth Management System allows your adviser to invest your money across all of the different asset classes using the top performing funds in all sectors of the market. You will benefit from being able to switch easily and cost effectively between funds and fund managers, all with limited and straightforward paperwork and administration, all at no additional cost.

    The service is designed to meet individual needs wherever you are in the financial planning cycle, whether your objectives are to create wealth, preserve wealth or to transfer wealth. Over 2200 investment funds are available with some of the most popular fund managers in the market.

    We have readymade and risk rated portfolios instantly accessible, enabling your adviser to invest your money with the degree of risk you are happy to take.

    Our flexible investment and pension contracts have no initial charges or exit penalties, and we can arrange your own client view giving you access to all your investment valuations in one place.

    Read more here…

  4. Savings & Investment

    Whether your intention is to save regularly for a specific purpose or to grow the money you have already accumulated, structured savings and investment advice will help you achieve your aims and goals.

    We don’t sell plans or policies, we provide you with good quality, independent investment advice to help your money grow. We will provide guidance on investment strategy, liquidity, portfolio construction, risk profiling and tax efficiency. Whilst all this may sound confusing, our experienced financial advisers will explain and guide you through all the various stages and options to tailor the right investment plan for you.

    Read more…

  5. Equity Release

    Popular Reasons for Releasing Equity

    There are no restrictions relating to what the funds can be spent on. You can spend the money on yourself; your home; your family; in fact anything at all. Here are some other popular reasons to release equity:

    Paying off debt or clearing your mortgage; home improvements; a special holiday or car;
    helping your children; improving your lifestyle and general financial peace of mind.

    Who might qualify for Equity Release?

    Most Equity Release schemes require that the participants be over the age of 55, and any outstanding mortgage or secured loans must be paid off beforehand, or when the funds are released.

    Find out more…

  6. Protection

    Unfortunately life is not as predictable as we might like. Bereavement, major illness, accidents and unemployment can easily threaten our financial security. Correctly planned, cost effective insurance cover can often mitigate these problems when they arise.

    More information here…

  7. Wills

    MAKING A WILL is the only way to ensure that your wishes are carried out after your death. If you have not made a valid Will, your property will pass according to the law of intestacy. This may not be what you would have wished for, but in any event, it is likely to take longer to finalise your affairs than if you had made a Will. During this time, your beneficiaries may not be able to draw any money from your estate. It can mean arguments and distress for relatives. Making a Will lets your loved ones know you cared enough to ‘sort things out’ in advance.

    More information here…

How Do We Work?

Our commitment is to provide our clients with personal face to face advice, and an ongoing first class service.

We believe that face to face personal discussions are extremely important in fully understanding your needs. As such out initial meeting is at our expense, and without obligation or time restraint. During our discussions we will encourage you to talk about yourselves, your concerns, aims and objectives, and at the end of the meeting we should have a clear idea of what is important to you, and how best we might help.

We want our clients to remain our clients, and we feel that the ongoing service we provide is second to none. Don’t take our word for it though, take a look at the Testimonials from our valued clients and see what they think.