The recent budget announced some surprising changes to how you can take your retirement income. These apply to “money purchase” arrangements, the type where you build up a lump sum of money, not for final salary or public sector schemes. For many years there have been several options you could have taken with your fund when you retire. The main ones being the purchase of an annuity or the alternative, income drawdown. I will explain the main features and changes which have occurred:
An annuity would give you a guaranteed income for a set term, or more commonly for the rest of your life. The rate is set when you purchase the annuity, with initial income levels being based on criteria such as health and whether you smoke.With this option you are effectively giving away the lump sum you have saved for a guaranteed income which may go on for a long time into the future, or only a few years depending how long you live. Although annuity rates have reduced over time, this is still the preferred option for many people who want the security of know exactly what income they will receive. This continues to be an option when you retire.
If you take income drawdown, instead of giving away your lump sum to purchase an annuity, the money would be invested. Your income would be withdrawn directly from the fund. Drawdown has been available for some time, although for most people the annual income level has been restricted. In the budget, it was announced that people can now take a higher level of income from their plans, and from April 2015 there will be no limit to what can be taken, giving people access to the whole fund. Any withdrawals, however, be taxed as income, which in itself will often limit the amount people will withdraw.
There are further changes for people with smaller pension pots allowing them to access the full fund from now. The limits to how much you can take have also been increased.
Although the above changes may sound simple, the flexibility introduces more complexity when planning your retirement. Everybody has different circumstances and needs when it comes to taking their retirement benefits. Some are not dependent on the money, whilst others are. Some have a specific need to take money from their pension fund, whilst others don’t. With this new flexibility it becomes even more important to get the right advice.
For independent advice on your retirement planning, please call me Claire Cook on 01273 224667. I would be happy to assist.
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