Personal Pension options for the over 55’s

You will normally be given the option of taking a tax free lump sum of up to 25% of the fund value which you can spend or save as you wish.  If you wish to reinvest your tax free cash into a pension, you should check HMRC rules allow you to do so without tax penalties.

If you opt for the most basic annuity, it will pay for your lifetime only, and won’t increase.  It will stop when you die.  This is known as a single life, level annuity.

If you want your annuity to survive you, you can choose one of these three options when you set up your annuity. Your choices cannot be changed once the annuity is set up, so consider them carefully:

• Choose a joint life annuity – income will be paid to your dependent (usually your spouse or partner) if they outlive you. You can choose how much income they receive (usually 50%, 66% or 100%).
• Choose a guaranteed period – income is guaranteed for a set number of years, even if you die before this. The income would then be paid to your beneficiaries for the rest of the guaranteed term.
• Choose to build in an annuity protection lump sum (value protection) – if you die before a pre-agreed age, the fund value, less income already paid, can be paid out to your beneficiaries, in some cases subject to a tax charge.

You can also choose to protect your annuity against inflation, by choosing an income which increases each year by a set percentage (e.g. 3% or 5%) or which moves in line with the Retail Prices Index (RPI).  These options are more expensive and will reduce your starting income, but over time could pay out more income overall.

Some providers have launched short term annuities, which pay out a fixed income for a set term, and provide you with a maturity amount at the end.  You can then normally use this lump sum to buy another fixed term annuity, a lifetime annuity or go into drawdown.

These short term annuities can offer you the chance to delay your lifetime annuity purchase and keep your options open.  This could be beneficial if annuity rates rise in the future, or if your circumstances change.

However these fixed term annuities only offer a secure income for the term, not your lifetime. You should consider the particular risks of these before you choose a fixed term annuity:

• Be completely clear about what happens if you die during the fixed term. You usually need to decide if there should be an income payable to your dependants, or if they should receive a lump sum.  If you don’t include these options and you die, the income will cease and no maturity value will be paid.
• Annuity rates can change regularly and can go up and down. If rates fall, and you need regular secure income when the fixed term matures, you may not be able to buy the same level of lifetime annuity you could have bought at the start of the term.

Income drawdown allows you to draw income directly from your fund, leaving the remainder invested and under your control.  You can chose the level of income you receive, which will be unlimited from April 2015.

There is no minimum income, which means that you can take tax free cash and leave the remainder fully invested.

The death benefits can also be more attractive than those available under a lifetime annuity.

Income drawdown is considered high risk when compared to a lifetime annuity as the income is not secure and can fall as well as rise.  If the fund performs well, income is likely to increase over the years and thus has some protection against inflation.  However, if performance is poor, or the amount taken from the fund is too high, income and the fund value will dwindle.

You have the choice of continuing in income drawdown indefinitely.  Alternatively, an annuity can be bought with your drawdown fund at any time.

Income drawdown is a complex product so we strongly suggest seeking advice if you are at all unsure of its suitability for you. If the level of investment control and responsibility income drawdown demands makes you uneasy, then income drawdown may not be for you.

Rather than convert your entire pension fund into an annuity or drawdown all in one go, phased or partial retirement allows you to do it in stages, gradually drawing on your fund over a period of time.

Each time you can take up to 25% tax free cash, plus a taxable income.  It can be tax efficient if you control your tax free cash and income to take advantage of personal tax allowances.

Like all options which involve a deferral of your annuity purchase, if annuity rates fall  in future then your eventual income will be lower than the income you might have received by buying an annuity earlier.