Retirement Planning Services in Tunbridge Wells & Kent
Retirement planning isn’t just about pensions.
Our Approach To Retirement Income Options
Before deciding what action to take on your existing plans or committing additional monies to pension plans, you should consider how and when you might draw benefits from these arrangements.
Benefits may be drawn from pension plans at any time after age 55 and you don’t have to retire from work in order to draw benefits. Drawing benefits will not prevent you from making further contributions into pension plans.
The two main methods of drawing benefits from accumulated pension funds are:
- Annuity Purchase
- Flexi-Access/Income Drawdown
Tax Free Cash
Normally up to 25% of the accumulated pension plan value can be taken as tax free cash. Most policyholders take the maximum available because they would like access to the capital so that they can spend it, pass it on to their beneficiaries, or invest it to receive an alternative stream of income.
When converting a pension fund to an annuity the tax free cash is paid in one lump sum, however, using a type of income drawdown, this tax free money can be phased (paid-out gradually) as income over a number of months or even years. This can help mitigate exposure to higher rates of income tax.
An annuity is intended to provide certainty of income for the annuitant’s lifetime and is taxed as earned income.
Open Market Option
Pension policies contain an important option that enables the accumulated pension funds to be transferred to a different insurance company. This can prove advantageous as this enables you to buy an annuity from the insurance company offering the best terms.
Annuity rates are affected by a number of factors such as age & health of the annuitant(s), the type of annuity i.e. level or increasing payments, and the yield on long-term gilts (which is affected by interest rates generally).
If you decide to buy a conventional annuity it is always worth investigating if you might qualify for some enhancement due to health conditions. Even your postcode can affect the annuity rate!
Flexi-Access Drawdown And UFPLS
These arrangements can provide a more flexible and tax-efficient income stream whilst improving death benefits and providing prospects for continued investment growth compared to annuity purchase.
With flexi-access drawdown you have the facility to draw taxable income as and when required directly from the pension fund and combine this with the tax free cash (or take the maximum 25% up front). You do not have to draw an income if it's not needed and there's no upper limit on the amount that may be drawn - but all withdrawals (in excess of the 25% tax free cash limit) are taxed as earned income.
This provides the flexibility to manage your flexi-access drawdown income with your personal lifestyle and income requirements. You might decide to reduce your working week, say, to 3 days in preparation for full retirement and need to supplement your employed earnings with an income stream from your pension plan. With the State pension now payable far later than most people had expected, using income drawdown to bridge the income gap offers a flexible option.
An alternative to the above is to use Uncrystallised Funds Pension Lump Sum (UFPLS) where withdrawals will consist of 25% tax free cash and the balance as taxable income up to the full value of the fund. This could mean that your whole pension fund is encashed over a relatively short period and with careful planning, avoiding unnecessary exposure to any higher rates of income tax.
You may purchase an annuity with the remaining pension fund at any time. The open market option and usual range of annuities remain available where your objectives and circumstances change.
Pension death benefit rules changed significantly in April 2015.
You can now nominate whoever you like to receive your pension fund on your death. This could be your spouse, children or grandchildren (in any proportions). You could even nominate someone unrelated to you if you wish, such as a friend, or even a charity.
Beneficiaries of your pension will sometimes have the choice of taking the fund as a lump sum or leaving the fund invested and using it to provide an income. But not all pensions are the same and some insurance companies have not aligned their pension products with the new flexible legislation. This means that some pension plans will not automatically allow the beneficiary to take advantage of flexi-access drawdown, income drawdown or UFPLS.
The tax treatment of the death benefits in the hands of the beneficiary will depend on the age of the policyholder at their death. This is a complex area of pensions that requires specialist knowledge in understanding what clients want to achieve for their families.
It is possible to have unlimited successors, so a pension fund could be passed on for generations if it has not already been spent.
Pension Investment Strategy
We generally advise that a ‘pension’ investment strategy in the years leading up to retirement reflects the basis upon which benefits are likely to be drawn in retirement.
If you expect to purchase an annuity with some of your pension funds it's sensible to reduce the exposure to investment risk as you approach retirement, to provide some certainty as to the emerging level of benefits.
If it's more likely that you will draw benefits directly from the pension fund i.e. flexi-access drawdown then the pension fund will remain invested. The continuing arrangement would then require regular investment reviews.
It is vital that we understand your objectives and requirements before providing guidance on the options available (and suitable) for your circumstances.
The ever-changing complex pension and retirement planning legislation means that it can be relatively easy to fall foul of regulations and possibly incur an unwelcome penal tax charge.
We can guide you through the latest changes including the Annual Allowance, Carry Forward and the Lifetime Allowance, which has reduced significantly in recent years. Those that have accrued significant accrued pension benefits might need to apply for Fixed or Individual Protection 2016 and it's still even possible to take advantage of the earlier changes to these limits in 2014.
The above information is not intended to constitute financial advice and we would strongly recommend you seek appropriate guidance from a suitably qualified and experienced Independent Financial Adviser before taking any action.
More details on our Retirement Planning Service can be found here.