Flexible Retirement

Increasingly people are looking to manage their own affairs and wanting more flexibility in how and when they take their pension benefits. Now that you no longer have to swap your pension fund for a traditional annuity that is fixed at the outset when you retire, it opens up a whole new area of ongoing financial planning during your retirement.

One of the most popular types of flexible retirement plan is the “Unsecured Pension”, (previously known as income drawdown) where the pension fund remains invested and you simply withdraw money from it as you go along. This is taxed as earned income (as would be a traditional annuity). In most cases this can carry on until you are 75, although there is a facility to go beyond that age.

There are certain rules laid down as to how much you can take out of your fund as income (these are actually quite generous compared to the amount that you might get if you purchased a traditional annuity) but you must remember that the more you take out of the fund the less will be left for the future, especially as the investment returns you get on the remaining pension fund may be lower than expected for the coming years.

The rules allow you to alter the amount you take from zero to a maximum level that is set out by the Government Actuaries’ Department. This can be very useful for example, if you are retiring early and are needing more income until you receive your state pension, when you may need less. Perhaps you are doing part time consultancy work and being able to vary your pension income could also help with tax planning.

Because the minimum amount you have to take is now zero, this basically means that you are allowed to stop and start it as you need. Importantly for many people, this allows them to take a tax free cash sum out straight away for whatever purpose, and delay taking an income until they need it.

Certainly one of the important features is that your pension fund doesn’t disappear if you die. If you die while taking an “unsecured pension” the remaining fund is then available to your partner or family. Again there is normally a choice as to how the money can be taken (a pension, continuing income, or a one off cash sum subject to a tax deduction).

Great care must be taken with these plans because of the built in risks as the pension fund remains invested and they are not suitable for everyone. They do offer a greater degree of flexibility than the traditional annuity but carry none of the guarantees.

The “Unsecured Pension” route is by no means the only option other than buying a traditional annuity.

For those who are looking for a way of minimising their income tax liability for a few years while benefiting from the security that guaranteed traditional annuities offer a “Phased Retirement” plan may be the right choice.

These plans take advantage of the “tax free” nature of the cash sum entitlement to help keep those income tax bills down. Instead of you receiving a one off lump sum at the start, (now conveniently called the “Pension Commencement Lump Sum” rather than the plain sounding “Tax Free Cash”), you receive it in stages together with slices of annuity bought each year.

In these days of fluctuating investment returns it can prove a very useful tool in generating the right level of income with the right degree of security.

Recent years have also seen the development of plans that offer a halfway house between the two types already mentioned. These allow for some of the fund to purchase a temporary annuity that lasts for say 5 years instead of for your lifetime. Once the five years is up you can then choose a different type of annuity if your needs have change. Generally there will be some sort of investment link to the remainder of the fund so you need to take specialist advice in this area before proceeding.

There are also plans with minimum income guarantees, and plans that offer investment linked annuities.

There has never been so much choice and flexibility as there is today when it comes to managing your retirement. With the current “silver generation” living longer than ever before, the need for expert independent advice is greater than ever.

Our specially trained Pensions Advisers will be happy to talk you through the options that you have and help you make the right choice in order to ensure that your retirement plans run smoothly. To find out more about flexible retirement from one of our specialists, simply click on any of our contact us buttons. 

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