Retirement Income Advice
Remember
Remember you do not have to take your retirement benefits with the pension company that you have saved with. Indeed in almost every case we can beat the offer from your pension company and if we cannot we will tell you - and there is no charge. That is how confident we are of our knowledge and expertise. You cannot lose!
The range of products available at retirement when linked to the complex rules surrounding pensions mean that for the best possible solution a specialist adviser is needed. Our objective in these pages is to give you an overview of your options so that when you speak to one of our specialists you can have an informed discussion. No financial product is entirely risk free. We will always try to advise you in a way that explores your attitude to risk and which ensures that you fully understand the various risks that are inherent in any course of action. Indeed, a section of our report deals specifically with the risks of any recommendation.
Guaranteed Annuities
An annuity is a guarantee from an insurer that they will pay you an income for the rest of your life. In effect they insure you against a very long life and running out of income. This means that the funds of those who die early are allocated to those who survive - the so called mortality cross subsidy.
There are a large number of providers in this market and we do have access to rates that are not generally available. As a leading specialist in this market providers will often trial rates with us before putting them onto general release.
It is important for you to consider the various options available to you. These include the ability to have a lower starting pension that increases each year, inclusion of a partner's pension and the availability of a minimum guaranteed return if you die early. Our quote facility on this site allows you to run up to six alternative bases at any time so you can quickly familiarise yourself with the various options.
Increasingly providers are seeking to assess your life expectancy as accurately as possible. This can be done in a variety of ways but the most common are to give higher rates for certain post code areas and for those suffering from a medical and lifestyle condition. Any conversation with one of our specialists will result in a discussion about your health and lifestyle to ensure we have all the facts to obtain the best possible rate. We protect your privacy by encrypting client medical details and uploading them to a secure site for access by product providers. You can be certain we will take care of you.
Perhaps the most important part of our service is looking at your existing arrangements and checking for guaranteed rates. These can often be much higher than those generally available and if they are we will tell you. Similarly we will identify any penalties that might be imposed by your current provider and make you aware of them before you proceed.
Short Term Annuities
A major consideration with annuity purchase is that you can only do this once - at retirement. It is important theriefore to make sure you get it right.
There is an alternative which is to purchase an annuity for a short term to give you income. At the end of the period a guaranteed amount of money is returned which enables you to return to the annuity market. There can be no guarantee of the income that can be generated at the end of the fixed period and this represents the main risk to this approach as the level of income you can obtain at that time will be dependent on rates available.
If you would like to consider this approach please call us.
Investment Linked Pensions
For people who would like to have their pensions linked to an investment fund this is possible. The range of funds include direct links to stock market funds or insurer with profit funds. Whilst you will benefit from positive invetsment returns you must be prepared to accept a fall in your income when markets fall.
Unsecured Pensions
Also known as income drawdown this arrangement has been popular with clients who hold larger funds. The basis is that funds remain invested and income is withdrawn each year. At five yearly intervals the level is set and you can draw between zero and 120% of this level each year.It is important that anyone considering these arrangements understand the risks associated with them which are as follows:
1. The investment fund may not perform. If this happens then income will fall.
2. if you buy an annuity at a later date then you may not be able to buy an annuity at the same rate as when you started the unsecured pension arrangement.
3. You will not benefit from the cross subsidy inherent in an annuity whereby the funds of those who die early are redistributed to surviving annuitants. This can be calculated as ranging from .1% at age 50, .5% at age 60 up to circa 2.2% at age 75. This is known as mortality drag.
The important point to remember is that these risks interact. For example the investment fund may rise but a fall in annuity rates may still mean a fall in income when you purchase an annuity.
To help you to quantify these risks we would calculate a critical yield that would define the annual return required to match the annuity you could buy today. We do this using the annuity rate that we can obtain for you based on your medical history or guaranteed rate availability as this produces a much more accurate yield than the general quotes produced by insurers which in general will understate the yield you will need. We can state with some certainty that for unsecured pension to be viable you must be prepared to accept the risk of an equity based investment portfolio. We are experts in the technical rules associated with these arrangements and the regular serviceing which they require. You will, however need to appoint a fund manager who will advise on the portfolio that will meet the critical yield. We would suggest that they should be a member of The Association of Private Client Investment Managers - APCIMS - http://www.apcims.co.uk.
One feature of unsecured pension that people find attractive is the return of fund on death, subject to a 35% tax charge.
Over 75
The Chancellor of the Exchequer announced in his budget speech the Government's intention to remove the requirement to purchase an annuity at age 75. This will happen in the 2011/2012 tax year following a period of consultation on the detailed arrangements.
In order to help those currently approaching the age of 75 the requirement to purchase an annuity will be put back to age 77 from 22nd June 2010. Therefore, anyone in unsecured pension who is approaching the age of 75 can remain in USP until the new rules become clear.
Anyone who has not yet taken any benefit from a pension fund from their fund, known as crystallisation, will need to do so before their 75th birthday and will then be able to decide if they wish to elect to purchase an annuity or follow the unsecured pension route. If they do not crystallise before age 75 then the 25% tax free cash entitlement will be lost.
There are a small number of annuities which allow income flexibility that is offered by unsecured pension but with annuity death benefits. These can be very useful for people approaching age 75 whio are concerned about the tax implications of Alternatively Secured Pension arrangements.
