The Importance of Pension Planning Š Part Two
Derby District & Law Society (D& DLS) magazine – March 2011
The Importance of Pension Planning – Part Two
Drawing an income from a Pension – the options available at retirement
As outlined in my last article, saving for retirement is vital to ensure that you can afford the lifestyle you want in retirement. When it comes to drawing your pensions, the decisions you make in terms of how to convert your pension funds into income will affect the level of income you will receive for the rest of your life, so it is important to consider all of the options available.
When can you draw benefits?
Under current legislation, benefits can be drawn from age 55. It may be possible to draw benefits earlier if you suffer from serious ill health (covered in our next article).
What is available?
25% of the value you have built up within a Personal Pension can be taken as Tax Free Cash (TFC). This must be taken before age 75. The amount of TFC available from an Occupational Pension scheme may be less than 25%, depending on the scheme rules.
Any remaining pension fund then has to provide you with a taxable income, unless the value of ALL of your Pensions is under £18,000 (2010/2011 tax year), then the remainder can be taken as a lump sum, less any tax due.
Occupational pensions are usually only able to provide scheme pensions. At the outset, you will be offered a number of different ways of setting up your pension, all of which will affect the level of TFC and income you will receive. It can be very valuable if you have a large Occupational pension to take financial advice on the advantages and disadvantages of the different options available.
Personal Pension Plans
Upon approaching your selected retirement age, your Pension provider will write to you outlining your options. The first thing worth mentioning is that you do not have to purchase an annuity from your current Pension provider! You have the option of ‘shopping around’ and transferring all of your pensions to a new provider on the ‘Open Market’ to secure a higher level of income.
There are also other ways to draw an income from your pension other than purchasing a standard lifetime annuity (please note this list is not exhaustive):
Impaired Life/Enhanced Annuity - Depending on your health/other lifestyle factors, this could provide you with a higher level of annuity income.
Flexible annuity – this is similar to a standard annuity but has an investment element and could provide a higher (or lower) level of income in the future compared to a standard annuity, through investment performance.
Income Drawdown – this involves simply drawing an income from your pension and leaving the rest of the pension invested. This can be a very high-risk strategy and is typically only suitable for those who are not reliant on the pension to meet their income needs.
Third Way products – these are specially designed products that use a number of the different methods detailed above to produce income.
Phased retirement – this is a way of gradually converting your pension to a standard annuity or Income Drawdown and leaving the rest invested, but this is only suitable if you don’t need the maximum TFC lump sum at outset.
The importance of a sensible retirement plan
The right way to draw an income from your Pensions will depend on many things, including:
The level of income you require and the extent to which you will be reliant on the income produced
The level of Spouse/dependants pension you require
Your state of health (and that of your spouse, if applicable)
The other sources of income and assets you have access to
Whether you require the maximum TFC available
Due to the numerous ways an income can be drawn and the affect this can have on the level of income that you will receive for the rest of your life, it is important that you take good financial advice!
A sensible overall plan
Professional Financial Centre (East Midlands) Ltd has successfully helped many clients to put a sensible financial plan into place that will last them for the rest of their lives. When looking at the huge choice of investments available we are able to prove that we only have your interests at heart. We do not have any vested interest in choosing one particular product or course of action over another. As changes happen, we review our clients’ plans, adjusting them to meet changing economic circumstances and family needs. If you want to challenge us to do the same for you or your clients, you will not be disappointed. If you simply want a second opinion, our view on your existing holdings, or have a general query about financial matters, please call us.
Professional Financial Centre (East Midlands) Ltd is a local financial services resource for Legal and Accountancy firms who do not operate in house Financial Services departments. We share the same ethos as Professional firms, in that we act purely in our clients’ interests, operating solely on a fee basis and accounting to our clients for any commissions. As a result of our qualifications, experience and culture, we qualify to be included on the SIFA Professional Directory of IFA’s, which is endorsed by the Law Society. The database can be seen at www.sifa-directory.info.