Retirement options

This is the reason after all why we save for a pension!

If you are lucky enough to be in a good defined benefit scheme all you have to do is decide whether or not to take the tax free cash option, where that choice is applicable, and perhaps the extent that you wish for there to be a dependants pension in exchange for some of your own pension.

If you are in a defined contribution scheme or have a personal pension life becomes more complicated as there are many choices to make.

if you are planning to retire overseas then click here

As an adviser this is where our role perhaps becomes of the greatest potential impact.  Before 1995 it was simple - you decided on the extent that you wanted take the available tax free cash and the balance of your fund secured an annuity with an insurance company of your choice.  You then had to decide on the structure of the annuity  - for example whether or not it should increase in payment, or if it should be paid with a minimum guaranteed period etc....

The annuity option still exists of course - and there are many more types of annuity these days.  But for those with larger funds other options are worth considering.

You can defer annuity purchase and "draw" your income from your pension fund  - within limits set by reference to tables published by the Government Actuaries department  - the so called GAD rates.

These limits are used to calculate the "relevant annuity". The amount of income you can draw is up to 120% of the relevant annuity.  Thie relevant annuity is recalculated every five years.  This type of income is called unsecured income and the amount taken may be anything between zero and 120% of the relevant annuity. The operation of these rules changes if you do not buy an annuity with your pension fund before you are 75 years old.

You can even use a basis known as "phased benefit" where your "income" is a combination of tax free cash and income  - with the arithmetic being redone every year.

If you decide to defer annuity purchase and take unsecured income - then you retain the investment risk. If you buy an annuity all the risk is transferred to the insurance company. If you live well beyond your "life expectancy" you are in effect subsidised by those who die prematurely - but only if you buy an annuity. Otherwise you retain this "mortality risk" as well.

More on that can be found in the pensions taxation reform part of this site.