Bravo_Bravo
LE
This issue seems to have generated a fair bit of heat lately so I thought it could be useful to outline the various options available from age 55.
The two extremes are, purchase an Annuity, and Drawdown / flexible access.
What is an annuity?
In short, you pay a lump of £ across to an insurance company in return for a guaranteed payment.
The shape of this payment can vary hugely, depending on personal circumstances and requirements. For example, smokers tend to die earlier so get a higher bang for their buck. There is ALWAYS a question on the application form along the lines of, "have you used tobacco products over the last 12 months?" If you're a non smoker, have a quick puff on a fag and you'll have to say yes - so will get a higher payment.
It is also possible to purchase a ton of guarantees, all of which will cost £ as they need to be factored in. Example being, escalation in payment; a guaranteed payment for 5/10 years; 50% of the annuity to go to a nominated beneficiary, etc etc etc.
Whats good about an annuity?
In a word; certainty. You will NOT have to worry about the rises and falls in markets; this is a great comfort to many. You know exactly what you're getting.
Whats not so good about an annuity?
Well, IMO a fair bit. Providers are VERY cautious in their assumptions so you may not get back as much as you would if you remained invested. The fund may well die with you or when your beneficiary dies, much to the delight of the provider. If you and your beneficiary get wiped out in a car crash or freak suspender incident, they'll be very pleased as they may not have to pay out any more money.
The fact that your income is guaranteed also means that you can't change it to suit your changing needs - if you have, say, income from shares and that suddenly shoots up, you may well pay more tax than you would want.
You're also not in the markets and so will not benefit from any investment growth. ( I am not going to discuss index linked annuities, which can provide some upside)
And generally speaking, you can't change your mind. the annuity is fixed.
Tell me about Pension Freedoms
In 2015 the Chancellor decided to kick most of the restrictions around what you could do with your personal pension pot into touch.
From age 55, you could take 25% of your personal pension fund as tax free cash in one go, nibbling away at the rest of the fund as and when suits you.
Whats not so good ?
Two main issues: the values can fall as well as rise - which people pretend to forget - and they can be complicated to look after. Which is why you should seek professional guidance as this is not suitable for everyone.
What is good about them?
Quite a bit actually, IMO.
You SHOULD benefit from long term growth, if you don't strip out too much income. You can take 25% tax free in one go, and as mentioned, access the rest as and when you need. Or, you can take a payment that is part tax free cash, part taxable as income. Payments can be tailored to your precise needs.
What I really like is the treatment of the fund on death. Pop your clogs before age 75 and the WHOLE FUND can be paid to your nominated beneficiary totally tax free. They don't have to take the money, though; it can be left invested and they in turn can nominate a successor beneficiary. Same drills on death - before 75, whole fund available tax free.
On death AFTER age 75, the whole lot can be cashed in BUT will be taxed as income in the hands of the recipient / beneficiary. However, you don't have to take the whole lot; it can be left invested, accessed as required, with successor beneficiaries nominated.
This is seriously good planning for the right people.
Have a look at these links for more information.
www.royallondon.com
blog.standardlife.co.uk
The two extremes are, purchase an Annuity, and Drawdown / flexible access.
What is an annuity?
In short, you pay a lump of £ across to an insurance company in return for a guaranteed payment.
The shape of this payment can vary hugely, depending on personal circumstances and requirements. For example, smokers tend to die earlier so get a higher bang for their buck. There is ALWAYS a question on the application form along the lines of, "have you used tobacco products over the last 12 months?" If you're a non smoker, have a quick puff on a fag and you'll have to say yes - so will get a higher payment.
It is also possible to purchase a ton of guarantees, all of which will cost £ as they need to be factored in. Example being, escalation in payment; a guaranteed payment for 5/10 years; 50% of the annuity to go to a nominated beneficiary, etc etc etc.
Whats good about an annuity?
In a word; certainty. You will NOT have to worry about the rises and falls in markets; this is a great comfort to many. You know exactly what you're getting.
Whats not so good about an annuity?
Well, IMO a fair bit. Providers are VERY cautious in their assumptions so you may not get back as much as you would if you remained invested. The fund may well die with you or when your beneficiary dies, much to the delight of the provider. If you and your beneficiary get wiped out in a car crash or freak suspender incident, they'll be very pleased as they may not have to pay out any more money.
The fact that your income is guaranteed also means that you can't change it to suit your changing needs - if you have, say, income from shares and that suddenly shoots up, you may well pay more tax than you would want.
You're also not in the markets and so will not benefit from any investment growth. ( I am not going to discuss index linked annuities, which can provide some upside)
And generally speaking, you can't change your mind. the annuity is fixed.
Tell me about Pension Freedoms
In 2015 the Chancellor decided to kick most of the restrictions around what you could do with your personal pension pot into touch.
From age 55, you could take 25% of your personal pension fund as tax free cash in one go, nibbling away at the rest of the fund as and when suits you.
Whats not so good ?
Two main issues: the values can fall as well as rise - which people pretend to forget - and they can be complicated to look after. Which is why you should seek professional guidance as this is not suitable for everyone.
What is good about them?
Quite a bit actually, IMO.
You SHOULD benefit from long term growth, if you don't strip out too much income. You can take 25% tax free in one go, and as mentioned, access the rest as and when you need. Or, you can take a payment that is part tax free cash, part taxable as income. Payments can be tailored to your precise needs.
What I really like is the treatment of the fund on death. Pop your clogs before age 75 and the WHOLE FUND can be paid to your nominated beneficiary totally tax free. They don't have to take the money, though; it can be left invested and they in turn can nominate a successor beneficiary. Same drills on death - before 75, whole fund available tax free.
On death AFTER age 75, the whole lot can be cashed in BUT will be taxed as income in the hands of the recipient / beneficiary. However, you don't have to take the whole lot; it can be left invested, accessed as required, with successor beneficiaries nominated.
This is seriously good planning for the right people.
Have a look at these links for more information.
Your three main retirement options explained - Royal London
When you reach age 55, you'll be able to access your retirement savings - even if you’re still working. So whenever the time feels right for you, you'll find three main ways to enjoy the money you've saved.
www.royallondon.com
Life with pension freedoms | Standard Life
Whatever stage you’re at building your savings and taking advantage of those new pensions freedoms means you won't have to hope for the best.
blog.standardlife.co.uk
