Retirement income advice
Retirement income advice
Your options at retirement
Planning your retirement
If you are planning to retire in the next few years you are no doubt thinking about how to take an income from your hard-earned fund. There are a number of options available and thanks to sweeping changes to pensions rules in April 2006 investors now have increased flexibility at retirement.
The earliest you can take retirement benefits is from age 50 (rising to age 55 from April 2010). One popular option is to set up a lifetime annuity, which pays a secure income for life. You also no longer have to buy an annuity by age 75, although we think an annuity will remain a sensible option for many.
75 remains a critical time as you must still start to take your benefits in some form by this age. Plus, any tax free tax you wish to take must be done before the age of 75.
There are also alternatives to an annuity. These can be higher risk and can be more expensive, but are also more flexible.
What are your options?
Conventional Lifetime Annuity
An annuity is the simplest retirement option and is a secure, taxable income which is payable for the rest of your lifetime. Once set up an annuity can't normally be changed, so you can rest safe in the knowledge that your annuity income will never run out.
Investment Linked Annuity
Investment Linked Annuities are designed to give you the opportunity to obtain an income that increases during your retirement . Unlike conventional annuities, these are linked to an underlying investment fund so they contain an element of risk.
Income Drawdown (Unsecured Pension)
This is a flexible option which may be a consideration for more substantial funds, or if you have other sources of income. Income Drawdown allows you to take a taxable income directly from your fund, leaving the remainder invested. It is available up to age 75.
Phased Retirement
Rather than convert the entire pension fund into an annuity all in one go, Phased Retirement allows you to take the benefits of your pension gradually over time, either by setting up an annuity or by moving more money into income drawdown.
Alternatively Secured Pension from age 75
This is a new option introduced in April 2006. Prior to this a pension fund had to be converted into an annuity by the age of 75. Alternatively Secured Pension (ASP) works rather like Income Drawdown, but for people aged 75 and over. If you don't want to go into ASP you must still buy an annuity by age 75.
Tax free cash
On retirement you will normally be given the option of taking a tax free lump sum which you can spend or save as you wish. Tax free cash is, as the name suggests, totally tax free. You can normally take up to 25% of your pension as tax free cash (this must be done before age 75).
Tax free cash is also known as "Pension Commencement Lump Sum" and since April 2006, 25% tax free cash is potentially available on most pensions including those where it was not traditionally allowed, such as AVC's and protected rights funds.