Your options explained
Please note that this section is directed mainly towards members of Money Purchase* pension schemes, rather than members of Defined Benefit (or Final Salary) Schemes who are provided with an income linked to their earnings with their employer.

* includes Personal Pensions, Retirement Annuities, Stakeholder Pensions, Executive Pension plans, Defined Contribution Pension Schemes, Self Invested pensions.

Deciding on how to take income at retirement is extremely important as once retired, you will not have many as many opportunities to top up your pension income as when you were working.

You can't access the money in your pension until you reach age 50, going up to 55 by 2010. Some pension schemes have additional rules about when you can take your benefits – check with your scheme provider.

However, you no longer have to stop working to draw a pension as long as your scheme's rules let you.

Top Tips for Pensions at Retirement
1. Shop around with your pension fund
2. Look at flexible options if you have other investments to provide income

Lifetime Allowance
Whenever any benefits are ‘crystallised’ these will now be tested against your available Lifetime Allowance. The ‘standard’ lifetime allowance had been set at £1.6 million in 2006/07 and will rise to £1.8 million by 2010/11, although some people will have a personal lifetime allowance that could be higher or lower than this.
If you decide to take money from your pension this is now referred to as a “Benefit Crystallisation Event”. In simple terms a benefit crystallisation event will normally occur whenever an individual takes a tax-free cash sum, a lifetime annuity, a scheme pension, an unsecured pension (income drawdown before age 75) or an alternatively secured pension (income drawdown after age 75). Pension transfers to recognised overseas schemes and lump sum death benefits (including any benefit paid out from a pension term assurance arrangement) paid before age 75 are also tested against your lifetime allowance.

Options
Lifetime Annuities (also known as Secured Pensions)

1. Traditional Annuity
This involves exchanging your pension pot for a guaranteed income for life, usually provided by an insurance company. You can add various options into annuity, for example if you wished to continue to provide an income to your wife/husband in the event of your earlier death, or if you wanted to see your income increase throughout retirement in line with inflation.

You have an Open Market Option which allows you to take your pension fund to any provider in the market place who will offer you a greater level of income – even though you may have used a competitive provider to invest your pension funds, their annuity rates may not be as competitive, so it is always worth shopping around for the best deal.

2. Enhanced/Impaired Annuities
These work in the same way as traditional annuities but may get you a higher level of income. Some specialist annuity providers will offer you a better rate if you have a lower life expectancy. This could be related to your lifestyle i.e. if you are a smoker, if you live in certain postcode areas, or if you have suffered medical problems i.e. high blood pressure, heart problems, cancer.

If you have suffered with medical problems then you may also be able to buy an annuity that offers Value Protection. Under a Value Protected arrangement, when the annuitant dies, subject to any spouse’s benefits that have been selected at the outset, the provider will offer up to 100% of the original investment back, less payments made, and less a 35% tax charge.

3. Invested Annuities
These annuities aim to provide an increasing income in retirement, by being linked to an investment fund of your choice offered by a provider. A handful of insurance companies offer these types of annuity, the most popular investment being a With-Profits fund, which aims to smooth returns over time. Your income varies in line with the underlying fund performance, so if you selected an investment that was directly linked to the stock market you could experience a volatile income.

With a lifetime annuity you need to make the decision at the outset, as to whether you wish to access a tax free cash sum on money, buy a pension for your spouse, the frequency of payments, and unless you have selected an invested annuity whether you wish the pension to increase in payment. You have the certainty of income for life, but would not be able to alter the basis of the income once in payment.

Unsecured Pensions

1. Fixed Term Annuity
Unlike a Lifetime annuity this type of annuity will give you a security of income whilst keeping your options open. The income is paid for a specified term (usually 5 years) after which you receive a guaranteed maturity amount (GMA), which is also fixed at the outset. The amount of GMA is designed to allow you to buy a similar income at the 5 year period, assuming annuity rates do not change, but the actual amount of income that you receive will depend upon the annuity rates at the time, and factors such as your health. You can continue to buy a 5 year fixed term annuity until you reach your 75th birthday.

This type of annuity gives you greater flexibility with your options, but there is still an element of risk, that you may not be able to buy the same level of pension at each review (if annuity rates have fallen in the interim period).

2. Income Drawdown
If you are willing to leave your pension fund invested, rather than exchanging the fund for an annuity, then Income Drawdown may give you additional flexibility in retirement. You need to take the tax free cash entitlement at the outset of the plan, and then can draw an income of up to 120% of what a traditional annuity might pay you. You can vary the income between the maximum allowable amount and nil, so the plan can fit in with your personal circumstances and requirements. The income limits are reviewed on a 5 year basis and at any time you can elect to purchase a lifetime annuity with your fund.

If you die whilst in Income Drawdown your beneficiaries have the option to take the balance of the pension fund less a 35% tax charge.

Investors in Income Drawdown plans like the flexibility and control over their pension planning, and do not have to make the same decisions with this type of plan that they would with an annuity. The plan does involve more risk though, as it offers no guarantees that the level of income taken will be sustainable. Whilst the pension remains invested, your future income will be influenced by the underlying fund returns.

Unless in exceptional circumstances we would normally only recommend this to investors with larger pension funds, or those with significant additional assets.

You can also look at combinations of Secured and Unsecured Pensions to maximise your tax allowances – please contact us for more detailed advice.

Alternatively Secured Pensions
Once you reach the age of 75, under current legislation, you must either purchase a Lifetime Annuity, or you can continue to leave your pension fund invested under an Alternatively Secured Pension (ASP). Under ASP the income that you can draw from the plan is more limited than under Income Drawdown (55%-75% of a rate prescribed by HMRC), and this limit is reviewed annually. If you die under ASP your dependents would have no access to cash from the investment, only dependent’s pensions. If the dependent is not a spouse then there are likely to be additional tax charges on the proceeds. If you have no dependents, the money will go to charity.

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