Independent Financial Advisors - IFA Bolton, UK

FTSE 100  5,393.27 +22.23  (0.41%) |  FTSE MID 250  10,146.36 +5.391  (0.05%) |  FTSE 350  2,845.21 +10.37  (0.37%) |  FTSE ALL-SHARE  2,783.03 +10.12  (0.36%) |  FTSE AIM INDEX  706.37 +4.38  (0.62%) |  Dow Jones Industr  10,320.10 +50.63  (0.49%) |  NASDAQ Composite  2,200.01 0.00  (0.00%) |  DAX  6,098.02 +14.17  (0.23%) |  ESTX50 EURP  2,727.38 +12.19  (0.45%) |  
Options on Retirement

If you have a money purchase pension (where the value of the pension fund at retirement is based on the amount paid in and how much this has grown by, such as personal and stakeholder pensions), then when you come to retire your income is normally secured by the purchase of an annuity (compared to final salary schemes where income can be paid out direct from the pension fund).

An annuity is effectively a promise to pay you an income for the rest of your life and is sometimes described as ‘insurance against living too long’, because with an annuity, the income from it lasts as long as you do.

Individuals are compelled to take benefits from their pensions by age 75, however, the new pensions rules offer far greater flexibility over how benefits are taken.

For example, since 6th April 2006 we have seen the introduction of new types of annuities.

‘Limited period annuities’ permit you to buy annuities in smaller chunks, each spanning a five year term, while the rest of your fund can be left invested. This will give individuals more choice on when to buy annuities and also allows them to maintain more control over their pension fund.

New ‘value-protected annuities’ respond to one of the key criticisms of annuity, that is, if you die very shortly after buying an annuity, your family loses out on your life’s savings because the money is absorbed by the collective fund of an insurance company’s annuity policyholders.

The most common criticism of traditional annuities was that if you die ‘early’ your money is effectively absorbed and re-distributed among those who live longer.

Roughly speaking, under value protected annuities, if on death the money used to purchase the annuity has not been used up by an individual and they are under age 75, the balance can be paid to the policyholder’s estate after a tax charge of 35 per cent has been deducted. However, it is essential to stress this potential benefit will be reflected in the rates for protected value annuities, which could be notably lower than on regular annuities.

‘Unsecured pensions’ are also available. This is similar to income drawdown under the old rules, where investors do not buy an annuity, but can take the tax-free cash sum and leave the remaining fund invested and income is taken from the invested fund and returns. Unsecured pensions can be used up to age 75 and policyholders can take up to a maximum amount of 120 per cent of the annual income payable from a single life, level annuity. There is no minimum amount.

Under the new pension rules, once you reach age 75 you will still normally have to purchase an annuity, if you have not already done so, although there is now an option called an ‘alternatively secured pension’ (ASP) which may be attractive to some people, particularly those who have a principled religious objection to annuitisation.
 
You are here  : Home Financial Issues Pensions Options on Pension Benefits