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Alternatives to Annuities
The conventional annuity is where, from the age of 55, you use your pension pot to purchase an income for life.
Though this is the most commonly used option, it may not be right the right one for you. Some of you may not be ready to make this final decision but you may still want to continue to nurture and invest in your future with the pension fund you’ve already built up. Fortunately there are a few options available to you.
Unsecured Pension
An unsecured pension, or USP, is a relatively popular option at the moment which allows you to draw an income from your pension fund whilst leaving the rest of the money invested. This option is available to anyone in a participating personal or stakeholder pension scheme. If you find your pensions scheme does not offer this solution you may transfer your pension to one that does.
Tax Free Lump Sum
Upon reaching pension age, currently 55, you can withdraw a tax free lump of up to 25% of your pension fund to do with as you please. You can then draw on the remaining fund to provide an income whilst leaving the rest invested. Any investment income at this point is subject to income tax. However, the reason you would take this option is if you feel the investment income would outweigh the tax and other charges, making it a beneficial option in the long run.
Once you reach the age of 55 you can use the remaining pension funds to purchase an annuity, or enter into an Alternatively Secured Pension (ASP).
Phased Retirement
Another alternative to buying an annuity is to enter into phased retirement. Here you can convert segments of your pension fund into tax free lump sums, or purchase smaller annuities, giving yourself an income but leaving the majority of your money invested. This option is ideal for someone wishing to gradually ease back from working, but to still have enough income to live. Over time the annuity income will grow as you purchase more and this will compensate for you working less.
The downside of this option is that you are taking capital from the fund and relying on investment growth to replace what you have taken.
Alternatively Secured Pensions (ASP)
Alternatively Secured Pensions are a relatively new product, having only been introduced in April 2006. Before these were introduced everyone was required to buy an annuity with their pension fund by the age of 75. Whilst most people still take this option, there is now an alternative approach in ASPs.
An ASP is a form of income drawdown. This gives you the opportunity to draw an income from your pension fund, and leave the remaining money invested. There are regulations and limits to look into. The Government Actuaries Department (GAD) has formulated a table for working out the upper and lower limits for how much you must withdraw, and how much you can leave invested each year.
Further information on these rates is available from the Inland Revenues website here.
http://www.hmrc.gov.uk/pensionschemes/gad-tables.htm
The advantage of ASPs is that you can use your remaining fund to purchase an annuity at any time. Furthermore, if you were to die the remaining fund can be used to provide a spouse, civil partner or dependent over 75 with an ASP or unsecured pension.
It is always a good idea to consult an IFA before making a decision such as this. You will all have your own personal circumstances and situations that need to be weighed and balanced in order to understand which option is best suited for you.
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