Retirement Options Guide

The intention of this guide is to provide you with some food for thought and some background information, to get you start thinking about your retirement options and how you would like to take benefits.

From April 2006, new pension legislation was introduced to the UK, with the intention of simplifying pensions. Whilst it has achieved this in some respects, which regard to retirement options, it could be considered to have made choices more complicated by introducing new options. However, for the consumer, more options is a good thing because taking pension benefits has become more flexible since April 2006.

Unfortunately the earliest age most are permitted to retire is rising from age 50 to 55 from 2010. (There are certain occupations that are permitted to retire early)

The old rule that meant an annuity had to be purchased by age 75 has been removed, although the purchase of an annuity is still a sensible and popular option for many.

The age of 75 is still important because you must start to take benefits in some form before you reach the age of 75 and most crucially an tax free cash lump sum that you want to take must be taken before age 75. 

There are alternatives to annuities, which offer more flexibility but can also offer more expense and more risk. Some options are not available if funds are below a certain level.

So what are the options? (Click on the links for more detailed descriptions)

• Conventional Lifetime Annuity
  The simplest, most secure retirement option. An agreed level of income is payable for the rest of your lifetime. Ancillary benefits or options can be purchased, such as a spouse or dependents pension, escalation or a guarantee. Once set up it cannot be changed, so careful consideration is required before purchase. You have piece of mind knowing the level of income you and/or your loved ones will receive. If you die, no funds are available to your estate.
• Investment Linked Annuity
  Investment Linked Annuities are designed to leave your funds invested in some capacity, giving the opportunity to obtain an income that increases during your retirement, depending on investment performance . Unlike conventional lifetime annuities, these are linked to an underlying investment  so they contain an element of investment risk. The ultimate risk depends on the funds or options chosen. If you die, no funds are available to your estate.
• Income Drawdown (Unsecured Pension)
  This is a flexible option which is popular with those with larger funds, typically in excess of £100,000 and/or who may also have other sources of income. This method allows you to take a variable level of income directly from your fund, leaving the rest of the funds invested. You have to review the withdrawals and performance regularly to ensure that your objectives are being met. Should you die, any remaining funds can pass to your estate, subject to taxation.
• Phased or Gradual Retirement
  With this option you opt to take the benefits gradually over time instead of all at once, either by purchasing annuities or by moving more money into income drawdown/unsecured pension arrangements. Should you die, any remaining funds can pass to your estate, subject to taxation and policy rules.
• Alternatively Secured Pension (ASP)
  This option was introduced in April 2006 and means that an annuity no longer needs to be purchased by the age of 75. An alternatively ecured ension (ASP) works in a similar manner to Income Drawdown, but is for people aged 75 and over. This is the only option if you don't want to by an annuity by age 75, otherwise an annuity still needs to be bought. Should you die, any remaining funds can pass to your estate, subject to taxation and policy rules

Tax Free Cash/Pension Commencment Lump Sums

Tax Free Cash or TFC became officially known as Pension Commencment Lums sums from April 2006. However, we will still refer to it as Tax Free Cash because that's exactly what it is. On retirement you can normally tax upto 25% of your fund totally tax free as a lump sum. However, this must be taken before you reach 75 years old, meaning it is not an option with an Alternatively Secured Pension (ASP).

From April 2006 it has also been possible to take Tax  Free Cash from  pension sources, such as AVC or Protect Rights funds, where previously this was not permitted.

It should be remembered that taking Tax Free Cash means you have a smaller fund left to purchase an annuity, meaning the income available is likely to be less. However, income taken from pensions is taxable at source via the Pay As You Earn (PAYE) system.

Retirement options matrix

 We recommend that you contact Annuity Arrow and discuss you plan and options with one of our retirement specialist.

Cick here for our contacts page.