When you decide to stop working (or slow down a bit) you have many alternatives. Often the decisions you make will be irrevocable so it is important that you consider all the alternatives available before making a decision. You shouldn’t just accept what is on offer by your existing pension provider as this could cost you a significant amount of income over your lifetime. This is true of both company and personal pensions.
Your options for taking income from your pension include:
-
Amount of tax-free cash
-
Guaranteed annuities
-
With Profits annuities
-
Flexible Annuities
-
Income Drawdown Plans
-
Scheme pensions
When purchasing an annuity you should consider the following as they can impact on your income:
-
Single life or including a spouse's pension
-
Level income or indexed income
-
Guarantee period
-
Smoker status
-
Availability of impaired life terms
Company Pensions
Company pensions fall into two broad categories:
1. Money purchase - where you have accumulated a sum of money to be used to buy an income. As well as the income offered by the scheme trustees you normally have the option to take the cash to buy your own pension which can often give you a higher income.
2. Final salary - where the scheme trustees will pay you an income for life based on your pre-retirement income and the length of time you have been a scheme member. The income is guaranteed as long the scheme and the employer remain solvent. If both fail the pension protection fund will provide a safety net but with a reduced level of income in some circumstances.
Tax-free cash can sometimes be taken at a higher than from a personal pension. However, care needs to be taken when taking tax-free cash from final salary schemes because you may have to give income at a rate that could not be replaced by the cash you are taking.
Company schemes will normally provide you wish a cash equivalent to transfer to an arrangement of your choice provided it is taken at least 12 months before your scheme pension age.
If you are in a company pension scheme you should start reviewing you options at least 18 months before the scheme’s normal retirement age. You should not assume that the scheme pension will be best for your circumstances and needs.
We will help you understand your options, their financial implications and risks, and recommend a suitable solution to achieve your goals.
Case Study
Mr A is aged 63, married, in poor health, and has a preserved company pension with scheme retirement age of 65 that will provide an index linked income of £10,000 pa with an income of £5,000 pa for his wife if he dies before her. If Mr A takes £48,000 of tax-free cash his income is reduced to £6,000 pa. The scheme offers a transfer value of £200,000.
Mr A opts to take the transfer value and start a phased drawdown plan. He takes £10,000 for a holiday and an income of £12,000 pa for two years and then he dies. Mrs A continues to withdraw an income of £8,000 pa for two years when she dies.
Assuming investment growth of 6% pa after charges an uncrystallised sum of £91,000 is passed to Mr & Mrs A's children free of tax and a further sum of £46,000 is also passed to their children after a tax charge of 35%. Mr & Mrs A have received £50,000 vs £30,900 from the scheme (assuming indexation of 2.5% pa).
If Mr& Mrs A live to a ripe old age and investment returns are insufficient, there is a danger that their income could fall below that available from the scheme pension.
