Common Post Retirement Options

Fixed Term Annuity

A fixed term annuity is also known as a fixed term plan or a third way annuity, and is written under flexi-access drawdown (FAD) rules. It is not a conventional lifetime annuity and allows you to delay (or even never) buy an annuity and receive a pension fund back in the future so you can consider your options again.

Key points

  • Maximum pension commencement lump sum available.
  • Guaranteed levels of income with no investment risk.
  • Options to increase each year with inflation or at a fixed rate.
  • Receive a fixed and guaranteed capital sum at some stage in the future. Most popular terms are 3, 5 or 10 year terms.
  • Include death benefits as a lump sum, or pay spouses pension.
  • The pension you receive is dependent upon Annuity rates at the time of purchase, which are currently low when compared to historical rates.
  • Whilst the GMA is guaranteed, the actual amount of income in the future will be dependent upon the prevailing Annuity rates at the time. Your future income may be lower or higher than the current level of income.
  • At the end of the fixed term, you may need advice which is likely to incur a cost.

Lifetime Annuity

As the name suggests this contract provides a fixed income for the remainder of your life. The income is set at the outset and no changes can be made at any stage. This is the traditional way of converting pension funds to income.

Key points

  • Maximum pension commencement lump sum available.
  • Guaranteed levels of income with no investment risk.
  • Options to increase each year with inflation or at a fixed rate.
  • Can pay income to a dependent spouse.
  • No capital return on death.
  • The income received depends on annuity rates at time of purchase, which are currently low.
  • An annuity may represent a lower value if you die early.
  • Depending on features selected the initial income maybe lower.
  • No flexibility once annuity is set up.

Impaired Life Annuity

An enhanced annuity also provides you with a guaranteed income for the rest of your life. The difference is that an enhanced annuity provides you with an income of up to 75% higher than a conventional annuity. This is because an enhanced annuity reflects your medical history and lifestyle. Because many pension income providers assume you will not live as long as someone with a clean bill of health, you are paid a higher income.

It is estimated that around 60% of people qualify for an enhanced annuity, and there are around 1,500 different conditions which are relevant. These range from moderate health and lifestyle conditions such as high cholesterol, smoking, excess weight and alcohol consumption to conditions such as cancer and heart disease. Even certain occupancies will generate higher levels of income.

Key points

  • Maximum pension commencement lump sum available.
  • Guaranteed levels of income with no investment risk.
  • Options to increase each year with inflation or at a fixed rate.
  • Can pay income to a dependent spouse.
  • No capital return on death.

Flexi Access Drawdown

This is the new contract created to host many of the new Pension Freedoms. Your pension fund remains invested and PCLS and income are drawn from this fund as and when requested. Clearly leaving funds invested whilst drawing down income is quite a complicated task where investment risk must always be considered. Ongoing advice is a must and we will therefore not transact a case without ongoing adviser services being applied.

Key points

  • Maximum pension commencement lump sum available.
  • Flexible levels of income with investment risk being central to the proposition.
  • Can pay income or lump sums to a dependent spouse.
  • Full capital return on death.
  • No guarantee that your income will be as equal to that of an annuity.
  • Future returns and the value of funds will fluctuate over time.
  • Poor investment returns and high income withdrawals can reduce the value of your remaining fund.
  • Withdrawing too much income in the early years may have an adverse effect on preserving the pension purchasing power or preserving the capital value of your fund.
  • The value of the remaining fund may not be enough to maintain income at the same level as an Annuity bought at the outset.
  • You could exhaust your fund, leaving you with no income if you do not budget properly.

Uncrystalised Fund Pension Lump Sum

This is central to the government Pensions Freedoms legislation, funds are simply withdrawn from a pension fund as a lump sum. 25% of the amount withdrawn is deemed to be PCLS and tax free. The balance is added to your income and is subject to income tax at your marginal rate.

Key points

  • A pension commencement lump sum available.
  • Taxable income available.
  • Remaining funds stay invested.
  • Full capital return on death on residual funds.
  • Not all providers may offer this facility.
  • Potential for significant tax charges if drawn.
  • Taking too much income and/or withdrawals could erode your future pension pot.
  • The fund will be subject to future fluctuations.
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