Great care needs to be taken with the options at retirement. Recent changes in legislation have resulted in complexity and in this article we will attempt to somewhat simplify the options, so that the different types of income in retirement can be considered.
The following is provided for information purposes only and we recommend that professional independent advice is taken prior to making any decisions or taking any action with your pension.
Secure income - this is paid for the rest of your life
Normally up to 25% of the fund used to buy an annuity can be taken as tax-free cash at the outset.
Regular income payments will be made directly into your bank account for life - you don’t need to do anything else once it's set up.
You can shop around at the start to find a better lifelong income, and could use your, and potentially your spouse's or partner's, health conditions and lifestyle to boost income further
At the start, you can make provision for a spouse or partner if you die first, or include an annuity that keeps pace with inflation.
Income is inflexible: the guaranteed nature means it can't usually be changed once set up.
It can't take account of changing circumstances, and if you've chosen a fixed income this has no protection from inflation
A blend of Secure and Flexible income - You decide how to mix and match your income
Depending on the options you choose normally up to 25% of the fund can be taken tax free, either straight away or in stages
Many people will want some kind of secure income to cover basic costs and bills. Some will also want a flexible income to supplement this.
Shopping around allows you to compare the services, benefits, rates and charges of different providers. This is important when deciding which options to choose
You can choose a blend of secure and variable income that is right for you but which could also provide flexible benefits for your dependents
Only some of your income is secure, the remaining income is not guaranteed and could run out.
It is very important to make sure you understand your options and check they are suitable for your circumstances before applying
Variable income - This allows you to draw money directly from your pension
Normally up to 25% of the fund used for drawdown can be taken as tax-free cash at outset. For UFPLS (Uncrystallised funds pension lump sum) 25% of each lump sum will be tax free
Income is not limited and can be taken as and when required
You remain in control and choose where to invest. This may be an advantage for some, but could be a worry for others.
You should request an illustration to see how your fund value could be affected.
You keep options open. There are various ways in which to pass on your pension when you die, tax free in some cases.
Income is not secure. This is a higher risk option which requires regular monitoring and review.
You could run out of money if you take too much out, you get the investment choices wrong, or you live longer than expected.