Pension income choices: post Pension Freedoms
Pension Freedoms has made a dramatic change to the options at retirement, so now is a good time to review the options.
Martin- Redman Partners writes:
All of the possibilities below are for defined contribution, (money purchase), schemes only. I will post further information on the possibilities for defined benefit, (final salary) schemes.
If you are a potential client, use this as a checklist of possible options and as a way of managing expectations in terms of income, complexity and advice cost. Not all options will apply to you as some will eliminate themselves, but please, get formal advice as the cost will be negligible compared to the potential worst solution for your income and the best alternative!
In summary, the pension income options are, smallest total pension fund to largest pension fund:
Trivial commutation: £1 to £30,000 fund, taking the whole fund as cash, with some tax-free and the balance taxed as income.
Uncrystallised Pension Fund Lump Sum, (UPFLS): £30,000 to £1.25Million, reducing to £1Million, April 2016, taking the whole fund as cash, with some tax-free and the balance taxed as income.
Lifetime Annuity: £1 to £1.25Million, Use the fund, less 25% tax-free cash, (PCLS), at your discretion, to buy an annuity for life, either from the original provider, (if the fund is less than £5,000), or from another provider using the Open Market Option.
Fixed Term or Temporary Annuity; £10,000, Net to £1.25Million, reducing to £1Million, April 2016. An annuity for 5 years or to age 75, with a return of some capital to either purchase a further lifetime annuity or use one of the other options.
Flexible Income Drawdown: approximately £50,000 to £1.25Million, reducing to £1Million, April 2016. The fund remains invested but income is taken up out at a level you select.
Scheme Pension: £200,000 to £1.25Million, reducing to £1Million, April 2016. This comes with several variations, the most common of which being that the pensioner, you, has no discretion and you get what the trust deed says you will get. If you have £200,000 of gross pension fund available, you can set up your own scheme pension with rules designed to allow you to provide spouse’s pension, dependents pensions and potentially pensions to children and grandchildren, if they are included within the scheme before your demise.
If you have more than £1.25Million in pensions assets, or £1Million after April 2016, then either you must have some form of protection in place or you are looking at a large tax charge on taking your benefits. In either event, professional advice is likely to be beneficial; remember that the Lifetime Allowance is due to come down to £1Million in April 2016, so you need to explore your options now.
Coming back to Earth now, you can see that your pension income options are dependent on how much fund you have got and your ultimate life plan. For the majority of the working population, with pension assets of between £1 and £60,000 the only sustainable game in town is Lifetime or Fixed Term annuities. As a very rough measure, work on a 5% return on capital at 65 years old or less if retiring early.
For people with over £60,000 in pension assets, income withdrawal is a serious alternative, but only for those who are not terrified of investment risk. For the terrified, an annuity has much to commend it, but the pension asset will be lost to the annuity provider. As a very rough measure, work on a drawdown rate of 4% to give an open-ended income and the potential to pass some income to relatives.
If you are determined to leave assets to dependents, spouse and issue, (the children), then unusual annuity options like value protection or some form of income drawdown or scheme pension will be essential.
Now fee-based advice is the norm, think in terms of hours worked for an estimate of costs, but please remember, I would concentrate on the potentially horrendous cost of getting it less than perfect. For myself, I am looking for £140 per hour, but all advisers vary and cost is no measure of quality.
To these figures you need to add the initial set-up for completing and analyzing a financial questionnaire, which is currently £420 for three hours adviser time. (An explanation of our fee structure is at http://www.martin-redmanpartners.co.uk/blog/day/month/year/our-cost-of-investment-advice).
Trivial Commutation: DIY or a couple of hours to complete some forms properly. Be wary of DIY as there are likely to be tax consequences you may not have considered.
Uncrystallised Pension Fund Lump Sum: DIY or a couple of hours to complete some forms properly. Be very wary of DIY as there will be tax consequences that can be up to 45%.
Lifetime annuity: two to seven hours, including checking for availability of enhanced annuities and selecting options.
Fixed Term or Temporary Annuity; as above
Flexible Income Drawdown: Set up, five to ten hours, investment reviews as often as agreed, two to three hours, one or more times a year and a tri-annual statutory review for maximum income, two to three hours.
Scheme Pension: set up, five to ten hours but this has to be open ended if you are looking for a novel trust deed or unusual features.
As a guiding rule, complexity always costs, so as soon as you move away from an annuity, the potential costs rise rapidly. For anything more than one-off annuity advice, you need a good dialogue with your adviser over a number of years, so make an agreement for advice and execution costs and stick to it.
If you would like to know more about how we can help you plan and realise your financial goals then contact us at firstname.lastname@example.org or call us on 01223 792 196 or visit the website at http://www.martin-redmanpartners.co.uk
The information contained is for guidance only and does not constitute financial advice. It is based on our understanding of UK legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change. Accordingly no responsibility can be assumed by Martin-Redman Partners its officers or employees, for any loss in connection with the content hereof and any such action or inaction.
We provide independent financial advice on investments, pensions, inheritance tax planning and family & income protection. We work with private individuals, businesses and professional introducers, such as accountants & solicitors, to ensure our clients financial advice needs are met.