Basic Guide to Retirement Income Options Can I afford to retire? Which retirement income solution is best for me? Should I take all my tax-free cash entitlement? Will my family benefit from my pension savings? How do I make the right decisions for me and my family? This basic guide will give you insights to these questions and your options at retirement. However, the guide is no substitute for specialist advice taking account of your individual circumstances and we encourage you to visit www.intelligentpensions.com for more information or call us on 0800 077 8807. This guide is for you if you have personal pensions or company money purchase pension schemes. If you have defined benefit (final salary) pensions or are unsure what type of arrangement you have, please contact us to discuss further.
Content: 1. Introduction 2. Your Retirement Options 2.1. Tax Free Cash 2.2. Income Drawdown 2.3. Annuity 2.4. Hybrid options 3. Considerations 3.1. Phased retirement strategies 3.2. Death benefits 3.3. Advice or Guidance? 3.4. Total Pension savings below 30,000? 3.5. Pension fund below 10,000? 3.6. Risks in retirement 4. Key Points Important Information: In the March 2014 budget, the government announced some significant pension reforms aimed at increasing the flexibility and choice when taking your pensions benefits. Many of the proposed changes are subject to consultation and are still to be passed into pension law. If the proposed pension reforms are passed in the summer Finance bill, from April 2015 the rules on flexible drawdown (see Section 2.2) will be completely relaxed so that it becomes available to everyone; Capped drawdown will be abolished. It is also envisaged that pension death benefits will be made more attractive and reduce from the current 55% tax rate. Clearly, where we are asked to provide retirement advice, we will take account of future market changes where relevant to do so. This guide is written on the basis of the currently available options in retirement.
1. Introduction Welcome to the Intelligent Pensions basic guide to retirement income options where we aim to simplify the options and considerations when taking your retirement benefits. As we re all living longer, choosing the right retirement income solution for your needs has never been so important. Finding the right solution for you will depend on an understanding of your personal circumstances and objectives and how the variety of retirement income solutions can be used to meet your needs. When selecting your retirement income solution, it s important to shop around for the best deal. You are not obliged to stay with your existing pension provider and many retirees find better deals, and more money in their pocket, by searching elsewhere. If you haven t used our Annuity or Not tool on our website, we would strongly encourage you to do so as this will give you an indication of the best retirement income solution for your circumstances and help you better understand the factors at play. The Intelligent Retirement Planning Service Intelligent Pensions is the UK's leading pension and retirement planning specialist. We have established ourselves as a leading provider in our field and currently have over 300m assets under management and have helped over 10,000 clients make the right retirement choices. Since our launch, we have pioneered the use of computer analysis as an aid to financial retirement planning. This has enabled us to deliver far more effective bespoke solutions to meet the needs of each individual client and has helped our clients to engage, visualise and understand their retirement planning strategies. We provide comprehensive advice in all areas of retirement planning for clients with 50,000 or more in their pension fund(s). Please visit www.intelligentpensions.com to try our retirement planning calculators/tools or to book an online consultation with one of our retirement experts. Alternatively, please call us on 0800 077 8807 to see how we can help you make the right retirement decisions.
2. Your Retirement Options: Most people wait until they stop work to take pension benefits but you can access your pension fund at any time from age 55. You don't have to take the money when you stop working. You can leave it invested if you have other income perhaps because you will still be working part time (so only need a small income from your pension). 2.1 Tax Free cash When you access your pension fund, you can normally take up to 25% as a tax-free lump sum. Pension Fund Tax Free Cash 25% Tax Free Cash looks highly attractive but it is not always the best decision to take this immediately. If you have other savings or no plans for the cash, other options could be more suitable. Taking cash to repay debt would be a good reason for drawing on your tax free cash entitlement. A highly attractive and tax efficient alternative to taking all your tax free cash is to adopt a 'phased' retirement strategy (see section 3.1). The rest of your pension fund can be turned into a regular income to live off this is taxable. There are three ways to do this (and for some retirees, it will be beneficial to have a combination of all three!): 1. Income (or Pension) Drawdown 2. An Annuity 3. A hybrid solution (3 rd Way)
2.2 Income Drawdown Some pensions let you keep your pension fund invested (so that it can grow) but take money out to live on. How long the pension fund lasts depends on how much income you take out and how well the investments perform. Unlike an annuity, any money left in your pension pot when you die can be passed on to your dependants. They can leave it invested and withdraw income when they need it (which is more flexible and can keep tax bills down), take it as one lump sum (potentially taxed at 55% and no further inheritance tax is due) or buy their own annuity. Income drawdown plans require regular monitoring and reviews to check ongoing suitability in relation to your circumstances and changes in the markets. Two types of income drawdown are currently available (Important Note: The government is currently consulting on plans to make flexible drawdown available to everyone and abolish capped drawdown) : Capped Income Drawdown: To reduce the risk of you running out of money, capped drawdown places an upper limit on the amount of income that you are allowed to take. The maximum income, set by the Government s Actuary s Department (GAD), roughly equates to 150% of the amount you would have received from a standard single life annuity. Capped income drawdown plans must be reviewed every 3 years until you reach age 75 and annually thereafter. The plan reviews act as a safeguard that you don t diminish your fund to such an extent that you risk running out of income in later retirement. Flexible Income Drawdown; Under flexible drawdown you can take as much income as you like from your pension fund at any time. To qualify, you must meet the Government s Minimum Income Requirement (MIR) of 12,000 per annum, usually made up by state pensions, scheme pensions and lifetime annuities. There is no requirement to take flexible drawdown just because you have 12k p.a. of pension, but if you do so you will not be able to make any further tax relieved contributions to pension schemes.
Care needs to be taken with flexible drawdown in terms of tax planning and sustainability of income. Large withdrawals could mean paying unnecessary tax and will naturally reduce the amount available to provide an income in the future. Who should consider income drawdown? Income drawdown by its very nature requires the investor to take on some risk and therefore it is not a solution that will suit everyone. By taking on the required risks, you can benefit from more flexibility in terms of how you take your ongoing income, how your pension fund continues to be invested and more favourable death benefits. As you get older, drawdown naturally becomes less sustainable and suitable. Drawdown exit strategies should normally be considered between the ages of 70 and 80. If you have over 50,000 in pension funds we would recommend you take specialist advice on all of the available options to find the best solution for your circumstances. The Intelligent Pensions Income Drawdown Service If income drawdown is the best solution for your retirement income, Intelligent Pensions will: Analyse your circumstances, income requirements and develop a retirement strategy Invest your pension fund to maximise income and meet your needs Facilitate any tax free cash payments and set up your regular income Review your circumstances annually and update your strategy Facilitate flexible drawdown where appropriate
2.3 Annuities How lifetime annuities work To be certain your pension fund will continue to provide you an income for as long as you live, you can use the rest of your pension pot to buy an income. This is called an annuity. You then get a taxable income for the rest of your life. Pension Fund Annuity Income Income Income... When you die the income usually stops, although you can choose for it to carry on to a spouse, for example. How much you get You're paid an income from an annuity for as long as you live so the amount you get depends not only on the size of your pension pot but also on other factors, such as your age and your health. There are also different types of annuity (often referred to as shapes ) such as: Level: You're paid the same amount every year. Inflation linked or Escalating: Your income will rise or stay fixed in line with inflation or a pre-determined percentage. Joint life: Your partner will be paid an income after you die. The more you choose to be paid out after your death, the smaller the income you receive whilst you are alive Enhanced: You may be eligible for an enhanced annuity if you smoke, are overweight or suffer from an illness. Enhancements can apply to a level, escalating or joint life annuity. Adding annuity options such as escalation, joint life benefits, guaranteed benefits and value protection will have the effect of reducing the initial income payable when compared to a single level annuity.
There are also a number of options that can be added to your annuity, such as: Guarantee periods where the annuity income is guaranteed to be paid for a fixed term in the event of death Value protection where you can choose to protect a percentage of your pension fund, t up to 100%. The lump sum payable when you die is the percentage of your pension fund that is protected, less the total gross income already paid to you as annuity income. Who should consider a lifetime annuity? Lifetime annuities tend to be suitable for people who don t want to, or aren t in a position to, take on further investment risk. Selecting an annuity guarantees payment of the retirement income for the life of the contract. However, it must be remembered that an annuity is effectively a one-way street and once established, it cannot be altered to take account of your changing circumstances or requirements. Other types of Annuity: Investment Linked: Your money remains invested with the potential for higher future income although your income may fluctuate, up or down, in line with the performance of the underlying investments. Fixed term annuity: These pay out for a fixed period, after which you are paid a lump sum to purchase a retirement income solution. Variable or Flexible annuity: These are complex products that pay you a guaranteed minimum income but leave the potential for your money to grow by keeping part invested (See section for more details). The Intelligent Pensions Annuity Service If an annuity is the best solution for your retirement income, Intelligent Pensions will: Identify the right annuity shape to meet your needs Establish if you qualify for an enhanced annuity Secure you the best income in the market Arrange your tax free cash payment Set up your regular annuity payments
2.4 Hybrid Solutions (3 rd Way) A number of relatively new solutions have come to market in recent years that attempt to offer a half-way solution between buying an annuity and income drawdown, hence they are often referred to as 3 rd way solutions. Examples include, variable, flexible and fixed term annuities. Like Income Drawdown, the pension fund, or part of it, is invested for potential future growth but unlike drawdown, a hybrid solution will normally have a safety-net. This safety net is normally in the form of a minimum guaranteed income and this is normally less than the amount that could be secured by an annuity. The safety-net can also be in the form of a capital guarantee over a period of time, an actual or minimum amount your pension fund will be worth at a given point in time. To provide a safety-net usually comes at a financial cost and with a restriction to your investment choices which can impact your long term retirement income. COST GUARANTEE The Intelligent Pensions Hybrid Service If you wish to consider a hybrid solution, Intelligent Pensions will: Analyse your circumstances, income requirements and develop a retirement strategy Select the most suitable hybrid strategy for your circumstances Invest your pension fund to maximise income and meet your needs Facilitate any tax free cash payments and set up your regular income Review your circumstances annually and update your strategy Facilitate flexible drawdown where appropriate
3. Considerations 3.1 Phased Retirement Strategies Phased retirement strategies can be highly efficient and tax effective. Your pension will be split into a number of segments, typically 1,000 and this enables you to take benefits from a certain number of segments rather than your entire plan. This allows you to convert part of your pension fund in staggered phases and set up a series of annuities, drawdown or hybrid arrangements over a period of time. Under this method, you can take a tax-free cash sum of up to 25% at each phase together with a taxable income. Your remaining pension fund is considered to be non-vested and continues to be invested and benefit from more preferential death benefits (see 3.2 below). 3.2 Pension Death Benefits Payments to beneficiaries in the event of death and in the form of lump sums, will normally be subject to tax at 55% for all pension funds that are vested (where benefits are being taken) and on the total value of funds for anyone over 75 years of age. If you opt to take the maximum tax-free cash from your pension, you will effectively be vesting your whole pension. Prior to 75, any pension funds that have not been vested, can be passed to your beneficiaries free of tax. 3.3 Advice or Guidance? There are a range of options and resources to help you secure the best retirement option. As specialist advisers, we would strongly advocate advice as the market and range of options are relatively complex. Furthermore, guidance websites and telesales operations are not providing their service free of charge and usually have a comparable, and sometimes more expensive, cost to taking advice. It is likely there will be a minimum cost for advice and this can become prohibitive for smaller funds (less than 50,000). If buying an annuity, your first consideration should be to identify the right shape (joint, escalating, protection etc?) and then look to identify the best rate or enhanced rate. If opting for drawdown or a hybrid solution, advice is an important ongoing factor to review your changing circumstances against changing external factors and to identify when and if to implement a suitable exit strategy and secure your long-term retirement income.
3.4 Total Pension savings below 30,000? For pension(s) funds below 30,000 and where you are at least age 60, you may be able to convert the whole of your pension fund to one-off cash payment. This is known as trivial commutation. If you exercise trivial commutation, 25% of the payment will be tax-free and the remaining 75% will be subject to income tax in the tax year received. 3.5 Pension fund below 10,000? Any single pension arrangement up to 10,000 ("small pension pot") can be taken as a lump sum. The number of pension pots that can be taken under these rules has recently increased from two to three. 3.6 Risks in retirement The 5 key areas of risk that you will face in retirement are as follows: Longevity Risk : The risk that you live too long. Most people tend to underestimate how long they will live and there has been an ever increasing life expectancy for people in the UK and around the world. Inflation Risk: Because we are all living longer, the effects of inflation can have a significant impact on retirement income and your standard of living in later life. Investment Risk: To mitigate the effects of inflation, you need to generate real returns, usually associated with equity investments. However, this must be tempered by the fact you may be drawing income from capital and in declining stock markets, this can have a detrimental effect on your capital. Withdrawal Risk: Simply the risk that you draw too much of your pension benefits too quickly and run out of sufficient income to meet your financial needs in later life, and finally; Flexibility Risk: The risk that you don t have the flexibility to meet your changing financial requirements throughout your retirement e.g. helping your children or meeting your long term Care needs. In addition to these key areas of risk is the desire for many individuals to preserve their pension capital for their next of kin, particularly in the event of premature death, having worked hard over many years to build up retirement funds. Annuities are highly effective at mitigating longevity risk, as they guarantee to pay out for your lifetime. Furthermore, if an annuity is selected with inflation indexation, it will also protect you against the effect of rising prices. However, an annuity is a one-way street and does not provide flexibility, the ability to generate further investment growth or particularly attractive death benefits. Income drawdown does not automatically mitigate any of the risks but instead gives the opportunity to achieve investment growth and control of your pension fund and a need to actively manage the ongoing risks you will face in retirement.
4. Key Points You can access your pension from age 55. Most people wait until they stop work but you can take it earlier or later than that. You're normally allowed to take 25% of your pension fund as a tax-free lump sum. You can take this in stages you don't have to take it in one go. The most common way to take an income is to use the remaining pension fund to buy an annuity. This pays a guaranteed (taxable) income, based on your life expectancy, until you die. There are different types of annuity such as level, inflation-linked, joint and enhanced. Shopping around for an annuity will help you to find the best deal If buying an annuity, make sure you accurately disclose your health and lifestyle status as you may be eligible for an enhanced annuity income. With a larger pension fund, you could consider income drawdown. You leave the money invested and withdraw (taxable) lump sums to use as an income. The income from income drawdown isn't guaranteed. But any money left remaining when you die can be left to your dependants (after tax) or charity. Hybrid solutions are available if you wish to keep your pension fund invested but want the peace of mind that a safety-net is in place. Income Drawdown and Hybrid solutions will require ongoing management and advice. Phased retirement strategies may be appropriate for your needs and deliver additional tax efficiency Taking specialist advice will ensure that you select the best retirement option for your needs and circumstances. The government has announced a number of pension reforms for April 2015. These changes are currently being consulted on for potential inclusion in the summer finance bill. Intelligent Pensions can help you to select the correct retirement income solution for your needs and maximise your long term retirement income. For more information please visit www.intelligentpensions.com or call us on 0800 077 8807.