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Preparing for Retirement, Planning, Advice, Services Contact Sabre Financial Kingsbridge, Salcombe, Totnes, Devon

Post Retirement Options

Suddenly, the retirement years are around the corner. You've thought things through, filled up the pension fund over the last thirty to forty years and your plans are swiftly all but a reality. Soon you'll be living off your pension. But what exactly does this mean?

When retirement time arrives, choosing what to do with your saved money requires careful thought. For many, the decision is easy – replace your work income with a pension income. It pays to choose carefully, ensuring you enjoy every penny you've invested and saved.

Easy Does It!

Whether you've got £1.5 million banked or £45,000, this is likely to be the biggest cash lump sum you've seen. But remember this. People are living longer and longer. Life expectancy is rising year on year. You might need this pot of money to stretch for another 30 years, or more.

The big decisions are not over yet, you can:

  • draw income from current provider
  • source an annuity on the open market
  • consider flexible access drawdown
  • trivial commutation

or any combination of the above.

Whatever you ultimately decide to do, know what your options are. Contact us for more information.

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WHEN YOU TAKE YOUR BENEFITS

When you started your pension plan you’ll have chosen a retirement age or date on which you will start taking your benefits. You can normally select an age between 55 and 75.

Retirement Advice, Planning & Services from Sabre Financial Kingsbridge

Depending on your plan and provider you may be able to take your benefits earlier than the date you originally selected or delay taking them if you don’t need the money yet (subject to the minimum and maximum age limits that apply at the time, which may change). In certain circumstances, you may be able to take benefits earlier, for example if you’re in ill health.

You don’t have to have stopped working to start taking your benefits.

In the run up to your selected pension date/age, your pension provider will write to you setting out the options you can choose from. You may want to discuss your options with a financial adviser.

The value of the plan when you decide to start taking benefits isn't guaranteed and can go down as well as up, and could fall below the amount(s) paid in.

You can currently take your benefits in a number of ways, including:

  • taking up to 25% of your pot as a tax-free lump sum, and use the rest to provide a taxable income by buying an annuity,

and/or

  • taking up to 25% of your pot as a tax-free lump sum, and use the rest to provide a taxable income on a flexible basis by transferring to a flexible access drawdown plan,

and/or

  • taking one or more pension encashments where part or the full value of a pension pot is taken as a cash lump sum withdrawal. 25% of each encashment will be tax free and the remainder taxable. This is also known as an Uncrystallised Funds Pension Lump Sum (UFPLS). Instead of a pension encashment, if the value of your pension pot is £10,000 or less, you may be eligible to take this under ‘small pots’ legislation. Please contact us for further details.

You don’t have to buy your retirement income (annuity or income drawdown plan) from your pension provider. You or your adviser may be able to find another pension provider who can offer you a more suitable level or type of retirement income.

The tax treatment depends upon your individual circumstances and may be subject to change in the future. Tax rules can change.

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You’ll normally have options as to how you use your pension pot to provide income.

These include:

  • Annuities
  • Income Drawdown
  • Phased retirement
  • Pension encashments

ANNUITIES:

An annuity is a plan which provides regular income payments or ‘instalments’ for life, in exchange for a lump sum (your pension pot). Once you have decided to buy an annuity, you must choose which type suits your needs. Once you've chosen an annuity, you won't be able to change or cancel it.

  • Level annuity. Your payments are fixed at the outset and continue at this level until you die.
  • Escalating annuity. Your payments can change each year. For example, you may choose an annuity which increases at a fixed rate each year of, say, 3% or 5%. Or you may choose an annuity which changes in line with the Retail Prices Index (RPI). Your annuity payments will initially be less than that available from a level term annuity.
  • Unitised annuity. If you buy a unitised annuity, you link your income to the performance of an investment fund or funds. This means your pension income could go down or up. There are typically no guarantees.
  • Enhanced annuity. (Sometimes called impaired life annuities.) People with medical conditions which could reduce their life expectancy such as high blood pressure, cancer or diabetes could get a higher income from their annuity. They’re paid more because the annuity company believes their life expectancy is less.
  • Temporary annuity. A temporary annuity can be bought for a fixed period, usually with a minimum of five years and a maximum of the period until age 75 is reached. The annuity income is set for the period and at the end of the period, a pre-determined sum is available to the policyholder. This can be used to buy another temporary annuity, or a lifetime annuity, or for income drawdown.

INCOME DRAWDOWN

An alternative to buying an annuity, income drawdown, as the name perhaps suggests, lets you ‘draw down’ (or take income) from your pension pot on a regular basis.

Your pension pot will remain invested. You can choose to take a taxable income from your pension pot on a regular basis or as one or more lump sums until the whole value has been taken or you choose to buy an annuity. If any income and the charges deducted from an income drawdown plan are more than any investment growth, the value of the plan will go down. This could reduce the amount of income that you can take in the future and the income from any annuity bought later.

High levels of income may not be sustainable and in some cases could reduce the value to zero. You should consider the impact this might have on your income in retirement.

If you exhaust your available funds, you should consider how else you will provide for your retirement.

Some providers may have maximum age restrictions (e.g. you can only remain invested in the product until age 75) and high minimum investment limits.

When can I buy an annuity with my pension pot in my Income Drawdown plan?

You can use all or part of your pension pot at any time to buy an annuity (though some providers may have age restrictions).

The tax-free cash can be taken at outset or accessed over a period of years.

What happens if I die?

On your death, any remaining pension pot can be paid to your beneficiaries as a lump sum or used to provide them with an income.

PHASED RETIREMENT

If you intend to ease yourself into retirement gradually, then you might want to consider phasing your retirement. On a regular basis, usually annually, you can use part of your pension pot to provide a taxable income, or take a tax-free cash lump sum and reduced income.

Your income can be provided either by buying an annuity, or by income drawdown.

The part of your pension pot not used to provide an income (and tax-free cash) remains invested with your pension provider. If you die before you’ve taken all your pension pot, the remainder can be used to provide a lump sum death benefit to your beneficiaries. Alternatively, it can be used to provide an income for your dependants.

PENSION ENCASHMENTS

These are also known as an Uncrystallised Funds Pension Lump Sums (UFPLS). This option allows you to take all of your pension fund at once or in several lump sums.

25% of each encashment will be tax free. Your pension provider will deduct tax from the remaining lump sum using the Emergency Tax Code. The amount deducted may be more or less than the tax that is due when your other earnings in the tax year are taken into consideration, so you may need to claim back some of the tax from HMRC or pay more. There may be a significant delay in receiving any tax which you reclaim from HMRC.

Once you’ve withdrawn your lump sum, it’s up to you if you want to invest it elsewhere or spend it.

Your pension company must tell you that you have flexibly accessed your benefits under the new pension rules within 31 days of you taking the money. You will then have 91 days to inform all other pension schemes if you are still putting in new money, even if it is a company pension scheme that only your employer pays into. This is because the amount that can be paid into a pension scheme by you or on your behalf, that attracts tax relief, is now reduced to the Money Purchase Annual Allowance of £10,000 and your other schemes need to know that.

Once you've withdrawn your lump sum, it will become part of your estate. There may be Inheritance Tax to pay after you die.

Pension encashments may not be available from all products and may not be offered by all providers. Some providers may charge a fee or exit penalties may apply if you take benefits before the retirement date you originally selected.

Taking pension encashments will reduce the value of your plan. It may leave you with insufficient funds when you are older. High levels of pension encashments may not be sustainable and could reduce the value of your plan to zero.

The value of the tax benefits of a pension plan depend on your individual circumstances. Tax rules and your circumstances may change in the future.

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