Category : annuities

Combining an annuity and drawdown

Posted By: Phil Handley DipPFS AwPETR On June 1, 2016 Category: annuities drawdown pension

Combining an annuity and pension drawdown can give you the best of both worlds. Traditionally people opted for the security of an annuity at retirement, but since the new reforms and the flexibility they offer, pension drawdown has become the product of choice.

One of the major concerns with people entering drawdown however, is their lack of investment experience and/or appetite to keep an eye on the stock market to ensure the fund is performing.

It’s all well and good having the flexibility to access your complete fund through drawdown, but it comes with the extra risk that it may run out before you reach the end of your retirement years.

Annuities offer the security that your income won’t run out, however doesn’t come with the flexibility and access to capital that drawdown does.

So what do you do?

Well, the answer could be a bit of both.

Using some of the fund to buy a guaranteed lifetime income through an annuity, whilst putting the remaining fund in drawdown.

This gives access to additional capital if needed, without exposing your complete pension savings to the stock market.

It also allows you to manage your income tax bill increase and decreasing yearly income

The emergence of this so-called ‘Blended Solution’, has led to a number of providers offering this combination though one single product.

The Retirement Account by Retirement Advantage offers a combination of drawdown and annuity but it’s all wrapped up in one plan. The whole plan falls under drawdown rules, which is advantageous because stand-alone annuity rules aren’t as favourable.

LV offer their take on a blended solution but with a bit more flexibility. They propose using a fixed term annuity alongside a drawdown plan.

The fixed term annuity provides a known income for a set period. The fixed term annuity isn’t linked to stock markets and therefore doesn’t carry investment risk. At the end of a specific term the fixed term annuity will mature, providing a lump sum to the either reinvest in a conventional annuity, put into another fixed term annuity, move into drawdown or withdraw as a lump sum.

The fixed term annuity is wrapped into one account with LV’s drawdown proposition. They both fall under drawdown rules and therefore remaining capital is owned by the estate and not lost on death.

This method could be of particular use if the retiree doesn’t have any medical history and therefore won’t qualify for enhanced annuity rates. The fixed term annuity could provide an income whilst not tying the retiree into unfavourable healthy rates for life. At the end of the fixed term, any subsequent medical conditions could then be used to lock into a lifetime annuity at better rates.

Partnership offer an Enhanced Retirement Account which again blends an annuity with drawdown. Partnership are marketing their plan as a ‘low cost’ solution due to the fee’s being comparatively lower than other plans on the market.

Partnership have a reputation for offering good enhanced annuity rates for people with a bit of medical history. This means less may be needed from the pension to provide the needed income resulting in more being available in the drawdown plan.

The alternative to using one of the pre-packed blended solutions is to create one yourself. This would mean sourcing the best annuity rate on the open market and creating your own drawdown portfolio.

The administration would be more, however you may be able to create a more suitable package. The cost to purchase your chosen level of annuity income would be the lowest and you could find a more tailored portfolio of investment.

Pensioners lose thousands by not shopping around

Posted By: Phil Handley DipPFS AwPETR On August 4, 2015 Category: annuities drawdown pension retirement advice

The latest retirement report by online financial service technology provider Iress, has highlighted some shocking statistics. For years the Association of British Insurance (ABI) campaigned to encourage people to shop around before buying an annuity. Their hard work was gaining some momentum until George Osborne stated in March 2014 that no will have to buy an annuity. The ABI’s latest figures show that 67% of people stayed with their existing provider in Q1 2015 compared to 47% in Q1 2014.

The best and worst standard annuity rates measured were 5.41% and 4.60% respectively. The different this represents using a pension fund of £100,000 is £810 per year. It seems the ‘shopping around’ message is no longer getting through with all the other news stories now hitting the headlines regarding pensions.

The main product to gain from pension reforms was income drawdown, with sales up 72% according to Iress. Drawdown is tempting retirees because of the full access and flexibility it offers, but is a more complex product to run. The same inertia is being experience with people not shopping around for a different provider. The negative results with drawdown can be even more dramatic however.

A retiree with a pot of £250,000 who withdraws 6% a year may face charges over a decade of anywhere between £16,325 with LV= and £26,490 with Scottish Widows, according to Which? This is a difference of over £10,000.

It’s understandable that due to its complexities, people are sticking with their existing pension provider and simply switching it to drawdown. The financial effect will never be known as there is no easy method of comparing plans once they’re started.

The value of financial advice in the at-retirement area can’t be more apparent with the above two examples. There is a cost to financial advice which is sometimes difficult to understand, but good financial advisers know this market which can ultimately save you thousands over your retirement.

Summary of your retirement options

Posted By: Phil Handley DipPFS AwPETR On March 14, 2015 Category: annuities Pension drawdown Tax-free cash UFPLS

Making the right choice with your pension fund has become even more difficult with the introduction of the new reforms. We have summarised the key advantages and disadvantages of the main options. It’s also important to note that you don’t have to make a commitment to one option; you can mix and match to suit your needs. As an example, it might be prudent to take out an annuity to cover your fixed monthly outgoings and use flexi-access drawdown to provide some flexibility.

Full cash withdrawal• Access to full pension fund
• 25% tax free
• No restrictions on what you spend it on
• Could be used to reduce liabilities
• 75% taxed against earned income
• Could move you into a higher tax band of 40% or 45%
• Not a lifetime income if all spent quickly
Flexi-access drawdown• Flexibility to take income as required
• Allow you to take income within tax threshold
• Ability to change income to an annuity at a later point
• 25% tax free
• Keeps fund invested give potential growth
• Tax efficient growth on invested fund
• Assets can be passed onto estate
• Investment risk and potential for fund to lose value
• 75% is taxed against earned income on withdrawal
• Could run out if large income taken and you live into later retirement
• Ongoing cost to run with management and platform fee’s
Fixed Term Annuity• Fixed income for a fixed term
• Guaranteed maturity value
• Ability to purchase an annuity in the future
• No investment risk
• Assets can be passed onto estate
• 25% tax free
• Future risk if the guaranteed maturity value may by a lower income than today if annuity rates are worse
• Can’t change the level of income during the fixed term
UFPLS• Flexibility to take ‘chucks’ of income when needed
• 25% with be tax free, 75% will be taxable against income
• Allows continued investment of unwithdrawn funds
• Untaken funds grow tax efficiently
• Investment risk of remaining funds
• 75% of any withdrawn funds taxable
• Low take up from providers offering the facility
• Income/capital is not guaranteed for life
Annuity• Guaranteed lifetime income
• 25% tax free
• Inflation proofing can be built in
• Any untaken funds can be passed onto estate on death (value protection). Only available through certain providers
• Control over assets given up
• No flexibility once taken
• Historic low rates meaning you’d have to live many years to get value back