Look closer at your options
When you reach retirement age, the chances are you’ll use the money in your pension scheme to buy an annuity. But you don’t have to do that, at least not straight away.
If you don’t want an annuity, or if you decide to put off buying one there are one or two other options you might be able to look at.
Most of the other options are only likely to be suitable if you have a large pension fund or other assets or sources of income, and are comfortable taking some risk with your money.
Cash option for very small pension pots
If the total value of your pension savings from all your pension arrangements is less than £18,000 you can take the full value of your pension pot as a cash lump sum.
This figure is currently set until 2015/16 but periodically it is reviewed and could change in the future.
An annuity is a kind of insurance policy. It’s a way of guaranteeing that the money you have saved for your retirement will provide a regular income until you die.
You can normally take up to 25% of the money you’ve accumulated as a tax-free lump sum. With the rest you can buy an annuity. If you have more than one company or private pension fund, you can take out a number of annuities and they can all start at different times.
With income drawdown you can take an income, but leave your pension pot invested. You can choose to have all or part of your pension fund used to provide your income. And your funds could be invested in a combination of equities, fixed interest investments such as bonds and gilts, and cash.
As the invested part of your pension remains invested, any growth is tax free. You won’t pay any UK income and capital gains tax on the profits.
However, the income you can draw is subject to maximum limits set by the Government and withdrawals are treated as taxable income. And of course, as with all investments, you must remember their value can go down as well as up.
Fixed Term Annuity
A Fixed Term Annuity is designed to provide you with a selected income for a selected term. As with pension annuities, you will receive a regular income and can select options such as death benefits. If you survive until the end of the term, you will receive a guaranteed maturity value which you can use to buy another fixed term annuity or any of the other alternatives
You could consider our Protected Retirement Plan
Variable or “3rd Way” Annuities
A third-way annuity is a halfway-house that offers some of the benefits of a conventional annuity and some of income drawdown. It allows investment in the stock market so you have the opportunity of capital growth, but it also guarantees you a minimum income.
Even if your pension performs poorly, you have the peace of mind of knowing you are guaranteed a minimum level of income. However this guarantee does come with additional fees.