Annuity Advice Kent
Income benefits from pension plans are taxable as earned income. Under current legislation there is a choice between flexi access drawdown and several annuity options when withdrawing money from a pension.
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Tax free cash:
Arguably the most desirable form of withdrawal as it triggers no tax on the proceeds and the pensioner controls how and when any income from the withdrawal is taken. The potential drawback to this option is lack of certainty in that while an annuity provides an income in theory guaranteed for life, the amount of income achieved from capital will depend upon the investment vehicle chosen, and thus investment returns and/ or interest rates. In turn the real value of any income will depend on inflation. However particularly after the 2014 budget leaving cash in a pension to roll up tax free and taking it as required – as withdrawals from what is effectively now a super ISA has real financial planning attractions.
An exchange of capital for income between the pensioner and an annuity provider. Under current legislation pension funds must be used to purchase an annuity by the pensioner’s age 75. Income is available in a variety of profiles:
Single vs. joint life:
A couple may elect that a pension is payable for the lifetime of the pensioner only, or for the longer of the lifetime of the pensioner or spouse.
Level vs. indexed:
Elect for pension to be level from the outset or indexed in line with the RPI or some fixed amount such as 2 or 3% per annum.
No payment guarantee vs. payment guarantee:
Payments of annuity will be for life but it is unusual to know one’s exact life expectancy at retirement. If no guarantee is selected the annuity dies with the annuitant, be it one month or 50 years from retirement; selecting a guarantee means that in the event of the annuitant’s relatively early death, income will be paid for at least the guaranteed period. The guaranteed period is typically 5 or 10 years.
Of the three pairs of options the options on the left: single, level and no guarantee all produce higher initial incomes from a given level of fund than their corresponding options on the right. Indeed when coupled with the taking of tax free cash selecting joint life indexed and guaranteed can halve the amount of initial pension. In order to decide on the “best” annuity at retirement it is necessary to know your own date of death and that of your partner; together with the likely rate of inflation on your retirement date in advance. As this is not possible one has to try and make an educated guess as to inflation and life expectancy.
Some companies offered guaranteed income rates for a given level of fund at outset. At the time these offers were made annuity rates had been stable for many years and the providers took the view that this was an attractive option for clients that would not cost them very much. Unfortunately, and most disastrously with Equitable Life, the annuity market changed radically and the guaranteed rates cost those life offices offering them a fortune, enough to close the company with the greatest exposure – Equitable. However many other companies also offered these rates and they are always worth considering.
Never forget that if you smoke or are in less than perfect health, you may qualify for an enhanced annuity.
Talis offers independent financial advice from the whole market. We are annuity annuities experts, based in Ashford in Kent. Contact Us for further information.