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.

 

  Advantages Disadvantages

Annuity

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:

  • Enhanced annuities pay higher incomes for people with reduced life expectancies
  • Joint life annuities provide an income to a surviving beneficiary, up to 100% of the value of the policy holder’s payments
  • Fixed-term annuities last for a specific period, after which time the policy holder is released and can choose a new product

Typically irreversible

 

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

Income drawdown

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*

Hybrid products

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.

Call 0800 304 7288 for a friendly chat about your pension

Important Infortmation

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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