Pension Options at Retirement
For anyone approaching retirement the options available for their pension plans can appear daunting. Despite the Regulator’s efforts at offering ‘guidance’ for most people the choices are not always clear, and even when they are, the right option to take based on their individual circumstances is not necessarily obvious.
Historically, most people opted to take their entitlement to what is usually a 25% tax free lump sum and exchanged the balance of their pension fund to purchase what is known as an annuity. Annuities have the attraction of providing a steady, predictable income stream, and there are various options, including protection against inflation, and the ability to build in pension guarantees in the event of early death.
However, annuities tend to be fairly inflexible although newer style options offer greater choice. Nevertheless, in an environment of low interest rates, the returns available can be disappointing. Individuals can opt for what is known as an open market option to secure better returns with other providers, whilst if there are any health considerations then an Enhanced Annuity is an option well worth considering. Despite their general inflexibility annuities do remove the issue of investment risk if structured on a guaranteed basis.
The whole market was opened up with the advent of Flexi Access drawdown, which provided much greater flexibility. Under this kind of arrangement individuals can still take up to 25% of the accumulated pension at retirement age but opt instead to keep the balance invested to generate a regular, taxable income. The key consideration however, is that you can run out of monies if withdrawals are set at too high a rate, and the underlying growth rate achieved is not sufficient.
Flexi Access drawdown also offered the ability to phase your tax-free cash entitlement over time and combine this with income drawn directly from the fund so as to create a more ‘tax efficient income stream’. Indeed, it is also possible to opt for annuity purchase later on in time with the remainder of your pension fund.
One of the more controversial options is also the ability to withdraw your entire pot as cash in a single transaction – this option is attractive if you wish to access your pension pot quickly, whether to spend or reinvest. However, 25% of each withdrawal is tax-free and the remaining 75% will incur income tax, so you could incur a very substantial tax charge. Insurance companies will automatically apply emergency tax to this kind of withdrawal meaning that the tax deduction can be very high, and people should tale extreme care when considering this option.
Over time however, pensions have changed from being inflexible vehicles to extremely tax efficient means of both building up wealth, drawing benefits in retirement, but also legitimately passing wealth down the family line free of inheritance tax. Contributions benefit from either 20% or 40% relief at the time of writing, whilst the funds grow virtually free of tax. Directors of limited companies can also contribute surplus profits from their business thus potentially reducing the corporation tax payable within the Company whilst building up monies for their retirement.
Pension planning is a very complex area but taking time to plan your objectives can ensure a comfortable retirement and making the right choices at retirement can help maximise your income in retirement and protect your funds for your family.
If you or your clients would like further information please contact Shaun Bell, on 01548 856444 or email firstname.lastname@example.org .
Sabre Financial is a trading title of Sabre Financial Planning Ltd. Sabre Financial Planning Ltd is authorised and regulated by the Financial Conduct Authority.
By Sabre Financial | Thursday, November 01, 2018