It was once expected that an individual would receive a fixed income when they retire and this would remain set for life. However, with dwindling access to Defined Benefit Pension Schemes and annuities offering less value for money than previously, it is important to consider all the options available, in order to maximise your income during retirement.
These opportunities arose as part of George Osborne’s shake-up of pension which came into effect in April 2015 and has resulted in much greater flexibility for people in retirement. Importantly, these changes also affect how pensions are viewed in respect of Estate Planning and it is important that you receive financial advice to ensure that you are funding your retirement in the most effective manner.
As mentioned, purchasing an annuity is now unattractive for many people. This is due to the continuing low yields on gilts (on which annuity rates are based), which have remained low since the Global Financial Crisis. This means that while annuities can offer the benefit of a guaranteed income for life, the annual amount that you receive may be less than you require to meet your income requirements. Increasing life expectancy has also resulted in life insurance companies having to amend the amounts they can pay as the income will, on average, be required for a longer period of time.
While a guaranteed income for life can be a positive for some, others may wish to have the flexibility to amend their income to meet their financial objectives, such as holidays, house refurbishments or gifts to children. Flexi-access drawdown, which has superseded the similar ‘flexible drawdown’, can offer a range of options which means you can take control of your money and use it as you feel fit. For instance, it is possible to take the tax-free cash from your pension and make no withdrawals, should you require the cash to fund a one-off objective such as the purchase of a property or new car. The tax-free cash can also be taken in stages as ‘income’.
You may choose not to draw an income if you have sufficient other income to meet your ongoing expenditure. The money can remain in the pension pot for the time being and therefore benefit from future investment growth. Furthermore, the money that remains in your pension stays out of your estate, so is usually not liable for Inheritance Tax should you pass away before drawing it.
Other options are also available and can be discussed in more detail, should they be appropriate for your circumstances.
It is worth noting that should you choose to draw income from your pensions in the flexible manners described above, any future contributions you wish to make, will be limited to just £4,000 p.a. This is called the ‘Money Purchase Annual Allowance’ and has been reduced from £10,000 from 6 April 2017.
Of course, with great power comes great responsibility and given the range of options and the potential for individuals to access all of their pension pots in one go, it is now more important than ever that specialist advice is sought before any decisions are made. We would be pleased to discuss your situation with you and offer advice to ensure that you are making the correct decision and can enjoy the retirement you have strived for.
Information provided on this website is general in nature and does not constitute financial advice. We recommend you speak to a financial planner in order that your specific objectives and needs are accounted for.
Whilst Independent Financial Planning will ensure that the information on this site is correct, they are not liable for any damages or loss arising from the website, or any errors in the information provided.
The value of investments and income from them may go down as well as up and you may not get back the amount invested. Tax legislation and the levels of relief from taxation can change at any time.