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.

 AdvantagesDisadvantages
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• 75% of any withdrawn funds taxable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