New forms of retirement income

For many years, reaching retirement for most people involved swapping their accumulated pension fund for an income provided by an insurance company. However, returns are now very low, thanks to poor interest rates and people living longer.

In the old days, you paid your money and made your choice

Fortunately, some changes introduced during the mid 1990s and updated in 2006 now mean that those coming to the end of their working careers can use alternative ways to generate an income from their pension fund.

The first of these was to draw an income directly from the fund, rather than purchasing an annuity (that is a guaranteed income, normally for the rest of your life) from an insurance company.

Pension fund withdrawal (called an “unsecured pension”)
The great benefit of this facility is that once you are over age 50 (although this rises to 55 on 6th April 2010) you can ask for up to a quarter of your fund as tax free cash and then decide whether or not you actually want a taxable income. If you prefer, you can leave the money within your pension fund and draw it later. You must take your tax free cash before age 75 and from that age you also have to take at least some income (ask your usual adviser for details).

Of course, this means that there are no guarantees and the value of your fund can go down as well as rise. What is more, annuity rates could get even worse, so that you will be no better off purchasing an annuity later on. The costs of this sort of arrangement can make it generally unsuitable for those with smaller pension funds.

On the other hand, you are not ‘locked in’ in any way and can buy an annuity, for you and your spouse or civil partner if you wish, at any time.

The ‘new kid on the block’
The lack of any form of guarantee has been a stumbling block for some people, particularly those with smaller pension funds. As a result, several insurance companies have been looking for an alternative and one of these is the fixed term annuity.

These work by giving you a guaranteed income for an agreed period, at the end of which there is a guaranteed lump sum available to you to either renew the scheme (if you are still under age 75), use ‘drawdown’ or to purchase a lifetime annuity at that stage. The minimum term is usually about three years, and the maximum from April will be 20 years, as benefits can no longer be taken before age 55 and must become a lifetime annuity or alternatively secured pension by age 75. (An alternatively secured pension is a more complicated form of pension fund withdrawal.)

Modern options are far more flexible

What are the benefits?
Whether or not this new approach will be suitable will depend on the individual and there are currently only two insurance companies to choose between. Among the advantages is that they are relatively flexible. You cannot change the income once the agreed fixed term has started, but you can vary how it works each time you renew it (or buy a lifetime annuity, instead).

For example, if your spouse or civil partner were to die during the first fixed period, when you had chosen a ‘joint’ income, you could improve your income by selecting a ‘single life’ income when replacing the arrangement at the end of the fixed period.

Just as importantly, should your health deteriorate during the first fixed period, you may well be able to secure a far better income at the end of the term on the basis of poor health. Try doing that with a conventional annuity!

This is a new area and one where individual professional advice will be essential. It is important always to seek independent financial advice before making any decision regarding your finances. For further information, please contact SDB Strategic Planners Ltd. The value of investments is not guaranteed; you may get back less than you put in.

NOTHING CONTAINED IN THE ARTICLE SHOULD BE CONSIDERED AS GIVING INDIVIDUAL FINANCIAL ADVICE. PLEASE NOTE THAT THERE MAY BE VARIATIONS FOR THOSE LIVING IN SCOTLAND AND NORTHERN IRELAND. 

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