There are an ever increasing number of Retirement Products designed to give you capital sums and/or income at the point of retirement.
There are many options as to which Retirement Products you choose to fund your retirement, with the main consideration being whether to utilise an annuity or drawdown plan, or a combination of both.
An annuity is payment that will pay a fixed sum each year (lump sum from ?). It is possible to use your pension fund to purchase a Lifetime Annuity, which pays a fixed income based on the size of the lump sum invested, life expectancy and any other options selected.
Once a Fixed or Lifetime Annuity has been purchased, there are no options that can be changed and it cannot be cancelled. It is therefore of paramount importance that all options are considered before an annuity is purchased.
The rates available for annuities have been steadily decreasing over recent years and it is unclear if or when they might begin to increase. The main reason for the falling rates are that on average we are living longer, as well as the fact that annuities typically invest in government gilt investments, which are providing lower rates than they have done in in past years.
The use of annuities to provide pension benefits is still very high, but as the rates have reduced in recent years, consumers have been favouring other annuity options which are on the market which can offer better flexibility.
As the options and range of Annuities can be a daunting one and choosing the correct provider can be complex we suggest you contact us to arrange a no obligation first meeting.
Short Term Annuity
In recent years, it has been possible to purchase a short-term annuity, which can have a term of up to 5 years, however there are strict guidelines on the benefits that can be provided as well as other requirements that must be met.
A drawdown pension allows you to keep you pension funds invested until a time in the future possibly when standard annuity rates improve at which time you can purchase your annuity on better terms. Drawdown Pensions provide an income at a rate which you decide, within limits set by the government. By keeping your pension monies invested they are subject to market movements and could fall, as well as rise in value.
Upon placing your monies into drawdown, you can usually take up to 25% of the amount placed as a tax-free lump sum. You then have the options whether to take the maximum income, a selected income, or no income from the remaining sum.
Typically the income available through drawdown plans is significantly higher than that available through annuities.
Please note that if income is taken and the investment performance isn’t high enough to sustain it, the pension monies could be depleted and could run out altogether.
In recent years, it has been possible to place your pension funds into Flexible Drawdown, this is essentially a Drawdown contract and still has the main features of a Drawdown contract but a major difference is that there are no limits on the maximum income that can be taken.
To qualify for Flexible Drawdown you are required to already have a secure income of at least £20,000 in place which can be made up from existing Annuities, State Pension and Company Pensions, but cannot include investment income or income for pension drawdown or interest on bank accounts.
The use of Flexible Drawdown is typically a high risk one, but can provide income at a much higher level and can be the most suitable option for those with a need for a higher or short term income.
Pension Drawdown and Flexible Drawdown schemes can be complicated and we strongly suggest you contact us to discuss your options
Final Salary Schemes
Although Final Salary Pensions are becoming less common, many people still have older schemes and a fortunate few of these are still allowing contributions to be made. The cost of providing the benefits provided by a Final Salary scheme is the main reason for the reduction in the number of these plans. The high level of benefits in retirement these schemes can provide can be very good, and in general is one of the reasons why the majority of these schemes should be left as they are and not transferred into other pension vehicles until they have received Independent Financial Advice on the suitability of the transfer.
Open Market Options
All pensions that are registered in the UK are required to offer an open market option or transfer value. This means they must provide a figure that could be transferred elsewhere to purchase an annuity or place into drawdown, should you think that you can get a better deal for your pension money somewhere else, this is a Retirement Option that has been exercised more and more since it was introduced.