Pensions

Options at Retirement

This section relates primarily to personal pensions. However, it is possible to transfer benefits from an occupational scheme into a personal pension, in order to take advantage of the options available.

Pension benefits cannot usually be taken before age 50, although this will change to 55 in 2010. It is possible to delay taking benefits until age 75.

In most cases, 25% of the fund is available as tax-free cash. The remainder of the fund must be used to provide an income. This is most frequently taken in the form of an annuity, which is an income payable for the life of the pensioner. An annuity is rather like life assurance in reverse, in that, the shorter the life expectancy, the higher the payment that will be made.

There are various options available when purchasing an annuity. For example: -

• Should it be level or increase each year?
• Should any spouse's pension be included?
• Should any guarantees be included?
• Which provider is giving the best rates?

The highest rate available will be for an annuity which is level and does not include any guarantees or spouse's pension.

Pension benefits do not all have to be taken at the same time. It is possible to 'phase' retirement, so that only a proportion of the fund is 'vested' initially, with the remainder continuing to be invested. Clients with larger funds may choose to vest a proportion of their remaining fund each year. There are also options for those who would like to start drawing retirement benefits, but would prefer not to have to commit to an annuity, at this stage. 'Income drawdown' arrangements allow this flexibility. Using this facility, it is possible to take tax-free cash from the fund, but delay annuity purchase, so that the remaining fund stays invested.

Changes introduced in April 2006 make it possible to avoid annuity purchase altogether. There is a maximum level of withdrawals that can be taken from the fund, to provide an income, in a particular year and the level of this can be varied each year. The new rules do not insist on income being taken. This allows those who require capital, rather than immediate income, to preserve more of their fund, for future income. As with annuity purchase, it is possible to phase income drawdown, rather than having to take all of the available tax-free cash at one time.

The most flexible plans allow a combination of any of these options. It is therefore possible to have a self invested personal pension which allows a combination of phased income drawdown and phased annuity purchase, while also allowing new investment into the plan. Income drawdown arrangements tend to have greater administrative costs than the alternatives, so they are usually more appropriate for larger funds. It must also be remembered that if fund performance is poor or annuity rates fall, the ultimate level of income may be lower than that which could have been purchased originally. However, some clients will feel that the added control and flexibility more than justify the risks and charges.

Retirement planning, other than simple annuity purchase, is a complex area of financial planning, where expert advice is critical, for those wishing to make fully informed decisions.

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