RETIREMENT OPTIONS
Our table compares the options for turning a defined contribution pension pot into retirement income. This common type of pension is where you’ve paid in a regular amount but income isn’t guaranteed (unlike with a final salary pension).
There are several ways to maximise your retirement income. As an intricate area of financial planning we need to take into account many factors including tax efficiency and flexibility. With expertise in this area Premier Wealth Solutions can provide detailed advice following a thorough financial review.
Some of the main types of pension contracts available for drawing your pension benefits include:-
- Annuities
- Phased Retirement
- Pension Fund Withdrawal (UFPLS)
- Capped Drawdown
- Flexi Access Drawdown
- Small Pots Access
- Scheme Pension
- Pension Investment Pathways
- Or a mixture of these options
We are qualified to provide guidance and advice on retirement options and hold specialist qualifications in this area. Having worked within a pension actuarial firm, pension advice remains one of our core services.
DRAW YOUR BENEFITS FROM YOUR CURRENT SCHEME
Pension arrangements can usually provide an immediate tax-free lump sum, commonly known as Pension Commencement Lump Sum (PCLS), sum of 25% with the remaining fund generating an income which is subject to Income Tax. Some schemes/providers also allow partial transfers to facilitate added flexibility.
PURCHASE AN ANNUITY WITH A DIFFERENT PROVIDER ON THE OPEN MARKET
Transferring funds from the existing provider and shopping around on the open market can considerably increase the level of your income. This is because some providers offer better rates than others.
Buying an annuity means using your built-up pension fund to buy the guarantee of an income for life from a company. Before you buy your annuity with another provider, you will still have the option to receive the PCLS from the original pension scheme, but the remaining fund value is passed to the new provider to secure your guaranteed income. The value of your pension income in these circumstances depends on several factors such as your age, current interest rates, the value of your pension fund and the type of pension you choose. Enhanced annuity terms may be available if, for example, you have a life-impairing medical condition.
FLEXI-ACCESS DRAWDOWN (FAD)
Under the option of FAD you can choose to immediately take 25% PCLS tax-free from your plan. Instead of buying an annuity with the remainder of the fund, the money remains invested and can continue to benefit from investment performance in a tax-efficient environment. There will be no limit on the income taken which is taxed at marginal rate.
After you have taken your entitlement to the PCLS at outset, you can choose to take as much or as little of the remaining pot as you wish, and it will be added to any other income you have in that tax year to determine the Income Tax rate that will apply. If you draw any income from this plan, any future money purchase pension contributions are limited to a £4,000 maximum Annual Allowance, and there will be no ability to make use of any carry forward. (i.e. topping up any unused annual allowance in future.)
As the rest of your pension fund remains invested in a tax-efficient environment, your final pension – and the income you may withdraw each year – will be determined by the continued investment performance of your funds. Careful attention, therefore, needs to be given to investment management whilst in Flexi-access Drawdown, to try to ensure that your income can continue for as long as possible and, if you do finally buy an annuity, you would be in a similar situation to that if you had bought an annuity at the start.
You can vary your income each year and the level of income you choose to take will have an effect on the value of your invested fund which will influence both future levels of income as well as the amount of any annuity income you may choose to buy.
Whilst in the short term many clients wish to consider drawing large amounts of income from their funds, in the medium to long-term it is important that you balance your income requirements with the investment policy to ensure the annuity purchasing power of your pension fund is maintained.
With this type of contract together with the UFPLS (Uncrystallised Fund Pension Lump Sum) option shown below.
Some considerations around taking benefits flexibly include:-
(1) The capital value of the fund may be eroded;
(2) The investment returns may be less than those shown in the illustrations;
(3) Annuity or scheme pension rates may be at a worse level in the future;
(4) When large amounts of income are taken or the maximum short-term annuity is purchased, high levels of income may not be sustainable;
(5) Be aware that some state benefits are means tested by the DWP (Department of Work and Pensions).
DRAW YOUR BENEFITS AS A LUMP SUM
Your current pension arrangement could provide you with multiple or a one-off lump sum. This is known as Uncrystallised Funds Pension Lump Sum (UFPLS).
There is no limit on the size of the lump sum you choose to draw. A simple overview to this form of taking your benefits include:
- UFPLS are a way of taking cash lump sums from a pension without purchasing a product.
- 25% of an UFPLS is normally tax-free and the rest is taxed at marginal rate.
- Emergency tax will normally apply to the first payment.
- Whether an UFPLS can be taken will depend on whether there is any lifetime allowance remaining and how old you are.
PHASED RETIREMENT
This option allows you to retire gradually. It can make the most tax-efficient use of your pension fund and it also allows you to build up the value of your pension when it suits you.
Generally, your pension fund is split up into 1,000 equal segments, and these segments can be phased in over a number of years. Every time you phase in some segments, you can choose to receive a PCLS of up to 25% of the value of these segments, and the remainder of the fund will be used to buy you an annuity. The pension bought will be guaranteed to be paid to you for life, and you can choose one that increases in value each year and whether payments should continue for your spouse if you die first. The remaining segments will continue to be invested in a tax-efficient environment, thus providing you with the possibility of higher future income.
PENSION INVESTMENT PATHWAYS
As of February 2021 the Financial Conduct Authority (FCA) introduced a new at retirement process which is a direct offering to the public via insurance companies. It is a general solution for the masses and will not suit all.
It is a non advised signposted service which offers a restricted fund choice at a low cost (ie total not to exceed 0.75%).
Small Pots
If you have a number of small pensions, you may be able to take them as a cash lump sum. You are allowed to take up to three small pots of £10,000 each from non- occupational pensions scheme and an unlimited number from separate occupational pension schemes (subject to the scheme rules). This could save you costs and provide you with benefits quickly.
Important Note:
HMRC has advised that, where an individual flexibly accesses their pension benefits and takes an income stream, they then have a duty to tell the scheme administrators of any ‘live’ (where contributions are still being made) or future pension arrangements. This is your own personal responsibility. This is because the money purchase Annual Allowance falls to £4,000 where an UFPLS payment is made and scheme administrators have a duty to inform HMRC if they think someone has paid pension contributions which exceed this limit.
You should note that, if you do not inform other scheme administrators that you have drawn income from your FAD within 91 days, you will be liable for a penalty of up to £300. Where information is not provided after the initial penalty, a further penalty of up to £60 per day may be applied until the information is provided. If incorrect information has been provided a penalty of up to £3,000 may be due where that incorrect information has been negligently or fraudulently provided.
We also provide advice and guidance to people divorcing who need to consider how their pensions fit in to the divorce process. We work with family lawyers to help clients, whether they are the transferee (receiving pension benefits) or transferor (giving a proportion of their pension away) under a pension sharing order.