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When you reach retirement, there are a number of ways you can use your pension fund to provide you with an ongoing income. Below are some of the options you will need to consider.
Usually a personal pension fund carries the option to take 25% of the fund as a tax-free lump sum. If a maximum income is required, it is usually better to take your maximum allowance of tax-free cash from a money purchase pension plan. However, this depends on individual circumstances and we can assess this to make sure it is right for you.
With a traditional annuity, you pay the money in your pension pot to an insurance company in exchange for a guaranteed income for the rest of your life. After your death, the income ceases and the insurance company keeps the balance of the initial investment.
You can purchase an annuity based on single or joint lives. A ‘reversionary annuity’ is also available, in which the pension is payable in full for the lifetime of the annuitant and then on their death a reduced pension will be payable to their dependant.
As an alternative to a conventional annuity, you can choose to purchase an unsecured pension, previously known as a drawdown. As part of the investment choices within an Income Drawdown plan (IDD), you can buy a short-term annuity. The maximum income is the equivalent of 120% of the Government Actuary department rates and there is no minimum requirement.
Phased Income Drawdown
Phased Income Drawdown is an option best suited to those under the age of 75 who do not require full access to their tax free cash. It can be particularly tax-efficient in that income is made of both capital and tax free cash.
As for traditional Income Drawdown, only those with larger pension funds and a more active interest in pension fund management should consider this type of scheme.
It is now possible to obtain underwritten annuities for individuals in ill health. One obvious form of enhanced annuity is for cigarette smokers. In the same way that smokers may now pay 25% more for their life cover, smokers could obtain up to 15-20% better annuity rates.