The quick and easy way to understand your retirement options
Are retirement options deliberately confusing?
It can seem that way with the seemingly endless stream of legislative changes, not to mention the terminology – from flexi-access drawdown to crystallised funds, and who decided it was a good idea to coin the phrase UFPLS (sometimes affectionately known as ‘hufflepuffs’ in the industry)?
The good news is that getting a basic understanding of the retirement options available to you isn’t as difficult as it may initially seem. The starting point is not the complex terms and jargon, but your wants and needs.
Once you’re clear on the answers to this, it is then a case of choosing the right pension for you.
It might be that you want income security, so you know exactly how much you will receive each month.
Or perhaps you plan to work part time and want flexibility with your income so you can take more or less as needed.
Maybe the income itself isn’t your main concern, but ensuring that you can leave any residual money in your pension to a beneficiary.
This is why it’s important to talk to a regulated adviser, as they can help you navigate the complexities and choose the most appropriate product for you, tailored to your personal circumstances.
The key differences between retirement options
To help get you started we have highlighted the main retirement options, which are available from the age of 55 – but this is a basic overview and cannot be used to make decisions about your retirement.
Offer a guaranteed income for life, even if you receive more than the value of your pension
Your income is set when you purchase, so if rates later decrease your income will not fall
There are different types to suit different people:
Your income is set when you purchase, so if rates increase you will not benefit
If your annuity does not rise in line with inflation then its spending power could fall over time
You could die before receiving the full value of your pension fund
Not all annuities will provide an income to beneficiaries
Money can be taken ad-hoc or as regular income
There is no limit on how much can be withdrawn in a year, but marginal rates of income tax are due on sums over the 25% tax-free amount*
There is no ‘death tax’, but beneficiaries will pay their rate of income tax on withdrawals if the deceased was 75 or over*
The fund remains invested, so its value could increase
An annuity can be purchased with all or part of the remaining fund at any time
Anyone entering drawdown after April 2015 has a reduced annual allowance of £10,000 instead of £40,000
Fund will need managing
The fund remains invested, so its value could decrease and performance is not guaranteed
There is a risk of depleting the fund
Taxable lump sum
You can remove as much of the fund as you want, or empty it completely
25% of each withdrawal can be tax free, or a 25% tax-free lump sum can be taken
75% of the fund is treated as taxable income, so you could owe the taxman a lot of money*
Growth on the savings and investments may be taxable once outside of a pension*
The money may be considered part of your estate and be considered for inheritance tax*
A combination of the security of annuities and death benefits and flexibility of income drawdown
You maintain ownership of the fund
Slightly higher fees than income drawdown
Careful management is required
Are you considering your retirement options yet? Let us know in the comments below.
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Tax treatment depends on your individual circumstances and may be subject to change in the future
The details provided in this article are for general information only and are in no way deemed to be financial advice. All of the material is correct as of the publication date, but could be out-of-date by the time you read the article. For our latest information and news, please see our articles section: https://www.portafina.co.uk/whats-new
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