Income in Retirement

When you reach your retirement, there are various ways that you can take your benefits. The two main routes are as follows:

• Purchasing an ANNUITYANNUITY
  A contract you buy from an insurance company, using the lump sum of money such as the proceeds of your pension fund, to guarantee you an annual income for life or for a period of time [e.g. ten years]. with a provider that guarantees you a regular income for life. These contracts can be tailored to suit your individual needs and can include various options such as a spouse's benefit, increasing income and others, but in essence once you have purchased your package, then your capital has gone.

It may be the case that your existing pension provider does not offer the most competitive income in retirement for the annuity you require. You therefore have the right to exercise the open market option OMO (OPEN MARKET OPTION)OMO OPEN MARKET OPTION
Your right at retirement to buy an annuity from a provider other than the one which administered your pension fund while you were working. whereby you can purchase the annuity you require with an alternative provider who offers a higher income. In addition, if you are in poor health, smoke, or have other lifestyle factors to take account of, you may qualify for an enhanced annuity.

• Drawdown pension offers a more flexible alternative to the purchase of an annuity. Unlike an annuity where the residual fund must be used to provide a fixed income stream, it is possible to withdraw a variable income directly from the pension fund, leaving the residual fund to continue to be invested and potentially benefit from tax advantaged growth. This type of arrangement offers no guaranteed income and may erode the fund over time. However the potential death benefits may be greater than under the lifetime annuity route.

There are two types of drawdown pension:

• Capped drawdown -  the maximum income that can be withdrawn is 120% of the prevailing annuity at all ages. These are a function of the annuity rates from the Government Actuaries Department, which in turn are based on long term gilt yields. Reviews of maximum income are required every three years if under age 75, and every year for those who are age 75 or over.
• Flexible drawdown - flexible income allows those who meet a minimum income requirement (MIR) to take income without limit from their pension fund. The MIR is initially set as relevant income of at least £20,000 each year, which is referred to as the minimum income threshold. The income has to be already in payment and the minimum income threshold is expected to be reviewed every five years.

In both cases, you are likely to be entitled to a tax free lump sum taken from your fund. This entitlement will be 25% of the fund, unless special arrangements have been built into your scheme to protect a higher figure.

Choosing a retirement income option is a big decision, and is often an irrevocable one. We strongly recommend that you get good independent advice before making up your mind. Contact us to arrange a free initial consultation to discuss your options.