Your Options In Retirement

As you approach retirement, now is the time to allow your mind to consider all the opportunities and adventures this next time of life could potentially bring.

It’s a culmination of all your hard work to date where you’re now able to spend more of your time on the things that bring you the most joy. However, there’s also likely to be some degree of trepidation and a sense of responsibility.

It’s important to make the right choices to ensure that your money lasts as long as you do and that you’re able to fulfil all the dreams you’ve had as you’ve been saving.

There’s a lot to consider and this is why you don’t have to do it alone. Your financial adviser will be there with you throughout this next stage of your financial life and will be able to take things at the right pace for you.

Your retirement income may come from several different sources, for example

your personal and/or workplace pensions,
your state pension,
your property / properties,
any ongoing salary from work as you transition into retired life, and
your other savings and investments.

This provides every individual with different choices, all of which have different tax implications and most of which can be deferred or taken immediately depending on your personal circumstances.

What is right for you is subjective, but understanding your options and having your Cheetham Jackson adviser there to make this complex world simple is key.

A pension is a long-term investment not normally accessible until age 55 (57 from April 2028 unless the plan has a protected pension age). The value of your investments (and any income from them) can down as well as up which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change. You should seek advice to understand your options at retirement.

What are my options with my pension when I retire?

Your first option is to do nothing. If you don’t need the money yet or are unsure what you want to do with it, then you don’t need to make all the decisions in one go. There is no one best way that works for everyone. Also, you may want to consider a combination of options as your financial needs change throughout your retirement years.

Other options include (but may not limited to),

Drawdown

Drawdown is available from defined contribution pensions (or by first transferring into one, which is likely to involve charges). There are two types of drawdown pension arrangement,

income withdrawal, and
short-term annuity

You don’t have to buy an annuity when you want to start taking an income from your pension fund. Instead, you can put off buying an annuity, perhaps indefinitely, and take an income direct from your pension fund. This facility is referred to as Drawdown Pension.

If you want to take part of your pension fund as a tax-free lump sum (usually up to 25% of the fund), you’re able to do this before starting to take income from the fund. All income is subject to income tax in the same way as earnings.

If you’ve never had a drawdown pension before, then the drawdown product available to you is flexi-access drawdown. If you already have a capped drawdown plan, you may be able to choose either to place further funds into your capped drawdown plan or to take out a flexi-access drawdown plan.

Short term (or fixed term) annuities fall under drawdown rules and are an alternative way of receiving an income rather than withdrawing amounts directly from the drawdown fund. After taking your tax-free cash lump sum, some of the balance is used to secure a temporary annuity not exceeding five years. As a temporary annuity costs less to provide than a similar lifetime annuity, the bulk of your fund will be available for investment.

After the chosen term, the temporary annuity will cease and you then have three options with the remaining drawdown pension fund. You can decide to,

secure another short term annuity,
take income withdrawals from the Drawdown Pension fund or
buy a lifetime annuity.

You may repeat this process over and over again as long as you have funds remaining in drawdown.

Partial Withdrawals (UFPLS)

You can withdraw a single or series of lump sums from your previously un-accessed pension without the need to move the funds into a drawdown plan first. 25% of the lump sum that you withdraw may be taken tax free with the balance taxed at your marginal rate(s) of income tax. Some pensions may not offer the flexibility to withdraw in a series of lump sums and it would then be necessary to transfer to a more flexible arrangement unless you wish to withdraw the entire fund.

In order to take advantage of UFPLS there are a number of conditions that will need to be met and your Cheetham Jackson adviser will be able to walk you through these to see if this is an available and appropriate option for you.

Annuity

This is a product that you can purchase with some or all of your remaining pension funds after taking your 25% tax-free cash.

A lifetime annuity is the most basic type of annuity and pays a guaranteed income for your life from the funds you have built up in your pension. Your annuity provider will pay you a regular income taxed in the same way as earnings. The amount of income payable is dependent on your age and health, the size of your pension fund, economic factors, the type of annuity and the options you select.

The options available include payment to loved ones in the event of your death, frequency of income, level / escalating / decreasing income, and enhanced / impaired life to name a few.

Annuities have declined in popularity over the years and rates have fallen. Part of the reason for the decline in popularity is that once you have purchased it you cannot cash it in or make changes to your selected options. However, despite this inflexibility, the guaranteed income they produce could be invaluable as part of your wider retirement plans, especially as you get older and potentially your capacity for loss or attitude to risk decreases.

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