Alternatives to Annuity
When it comes to retirement, most people depend on an annuity, which is built up on several factors, for example, your accrued pension savings, your age and your gender. Over time, factors such as an increased life expectancy have lowered the pension that you would expect to receive upon retirement.
If you were to consider a less conventional plan for when you retire, it could be possible to increase your income. The alternatives here are suggested particularly for those who may not need the security that a standard pension traditionally offers.
Officially known as the Unsecured Pension, this retirement option allows you to draw directly from your investment fund, without purchasing a lifetime annuity. It is ideal for those who have larger retirement fund (usually over £100,000) and are comfortable with taking a risk for the convenience that this method offers.
The possible maximum income that an Unsecured Pension offers may be equivalent to 120% of that of an annuity. You can also choose to withdraw no funds at all if you wish to (there is no minimum set), and the government reviews the maximum withdrawal amount every five years.
The aim of an Unsecured Pension is to build upon the growth of investments chosen by either you or your advisor. This means that your funds rely on investment performance and can fall in value. Such a fall could mean a drop in your overall income.
Additionally, you pay tax on an Unsecured Pension as earned income, just as you would with a standard annuity.
If you were to die before purchasing an annuity, your spouse would be able to draw from your Unsecured Pension funds in order to provide an income.
This is a very flexible plan in which your retirement funds can be divided into portions as you need them. This can be very useful if you wish to stagger your retirement. For example, some people may reduce their working days as they get older, and will need some of their pension to cover the shortfall. Most of the fund will remain invested, whilst parts of it can be transferred to an Unsecured Pension or an annuity.
With phased retirement, adequate amounts from your fund are put together to produce both a tax-free cash sum and a pension, which you can use to meet your required income. Every year, you calculate how much you need, and cash in enough of your pension to satisfy this amount. Phased Retirement can begin any time after you reach the age of retirement.
This is especially suited to somebody who would like their income to vary from year to year. It is not a guarantee of income and carries a great deal of risk for somebody who would be more comfortable with a standard annuity. If you can afford the risks, however, it could mean greater benefits for you and your family.
Choosing an Alternative
If you consider choosing an alternative to the standard annuity, you should be prepared for an element of risk. Your current circumstances and future needs should all be taken into account before deciding not to depend on an annuity. However, as you cannot turn down an annuity after having bought it, it’s worth considering the alternatives before you make your final decision.