From April 2015, a new regime has come into force widening the options available with your pension fund up to being able to withdraw the whole of your pension fund, subject to income tax being levied at your highest rates on the excess over the 25% tax free lump sum.
There appear to be around 8 options for the type of pension you may want and clearly good financial advice is needed if you are going to make the right choice of the type of pension that is right for you.
What follows is a very brief overview of the options available:
- Lifetime Annuity – a series of payments at selected intervals based on the size of your pension fund, annuity rates (these tend to mirror interest rates), and options selected.
- With Profit Annuity – similar to a lifetime annuity but with initial and future income levels linked to a with profits fund performance.
- Unit Linked Annuity – similar to the with profit annuity but with initial and future income levels linked to the performance of the underlying unit linked fund.
- Scheme Pension – the only option, without transferring your pension fund, for those who are in a defined Benefits scheme also known as final salary. Income is guaranteed for life though there are options available, e.g. spouses pension.
- Phased Retirement – your fund is divided into many sub contracts and your income is generated by converting some of the contracts each year, depending upon income requirements, with part of you income coming from the tax free lump sums arising from the sub contracts converted and the annuity generated.
- Capped Drawdown – an annual income can be taken from the invested pension fund subject to limits set by the Government Actuaries Department (GAD). These limits are based by reference to age, fund size and current gilt yields but, broadly, you can take up to 150% of the single life annuity that could have been bought at that point. Capped drawdown also retains the ability to continuing to pay into the pension pot of up to £40,000 annually.
- Flexi Access Drawdown – after you’ve taken your 25% tax free lump sum you can take up to the whole of your pension fund, subject to the fact that everything over the tax free amount will be added to your other income and will be taxed at your marginal highest rates.
- Uncrystalised Funds Pension Lump Sum (UFPLS) – allows for a lump sum to be withdrawn from an existing money purchase pension plan. The lump sum is as little or as much as the investor requires with 25% of the amount tax free and the remainder taxed as income at highest marginal rates.
The option to be able to access the whole of your pension fund in one go, or to take high levels of income, may have significant disadvantages:
- 40% or even 45% on part of the pension fund when it is taken whereas it could, perhaps be structured over years to remain within the 20% tax band, subject to your other income.
- You may run out of money and have no pension left for future years.
- Benefits are means tested so you might loose some of these.
- High Income withdrawals may not be sustainable by the fund over your actual lifetime.
- Your fund may not grow as well as forecast resulting in depletion of Capital for when any annuity is taken
- Annuity rates may fall further.
Do you have a strategy?
Of course none of us know exactly when we are going to die and few, I suspect, actually forward plan a budget of their anticipated income requirements year on year and, of course, none of us will know exactly what expenditure we might be required to find in ten years (energy costs for example). However, it is still possible to anticipate our requirements and for how long we may need them and what resources, including pensions, might be available to us. By having a strategy we might at least manage a more comfortable retirement.
For a chat about any matters covered by this article please contact me Philip Hunt, email philip.hunt@astonshaw.co.uk or telephone 01603 616300
