Looking for health, wealth and happiness in retirement
When you approach retirement, you now have even more choices than ever before.
The new pension rules introduced in 2015 now allow you to take your fund flexibly – either in full or gradually over the term of your retirement.
Exploring your retirement options
Having saved up to create a fund for your retirement, you need to take care on choosing the right option for you:
· An annuity – which provides a guaranteed income for life
· Income drawdown – which allows you to vary the income you take, subject to funds being available, but the remaining fund is still invested and exposed to investment risk.
· To take cash lump sums – known as Unsecured Fund Pension Lump Sums (UFPLS)
You can access your pension fund from age 55. You can generally take 25% of the fund as tax free cash with the remainder taxed as pension income.
Managing your retirement fund
Getting the most out of your retirement fund will help you to enjoy the retirement you have saved for. But before you make your choices you should consider:
Managing your tax bill
Pension income will be taxed (after you have taken 25% of the fund as tax free cash), so you need to be aware of the Income Tax you will pay.
Careful management of your withdrawals will allow you to reduce the tax you pay and means more money from your fund will end up in your hands. For example, you could spread your income needs over two tax years to reduce the tax payable as you will have a Personal Allowance and tax rate bands for each tax year.
An annuity cannot usually offer income flexibility, so varying income is only available for lump sums or income drawdown.
Providing for your planned expenditure in retirement
You may have set up some plans for your retirement, for example, you may need a large lump sum to repay your mortgage or for a family holiday or event now or in the future. You may also receive additional income in the future, such as the State Pension when you reach your State Pension Age.
You can phase taking benefits from your retirement fund, so you can access more tax free cash from your fund when you need to in the future and take lump sums if needed.
To meet your ongoing income needs, you need to consider that inflation will reduce the purchasing power of your income, so you may need more income in the future. You can include some escalation to increase your annuity payments, but this will come at a cost and your starting income would be lower. Drawdown will allow you to alter your income, provided you have some funds remaining, to suit your income requirements.
If you take your entire fund, you need to consider that you will face a higher tax bill as after you have taken your tax free cash, the remainder is taxable as income. Secondly, you need to consider how will you meet your ongoing lifestyle costs in the future – do you have other income sources which can meet your income needs in retirement?
Helping your retirement fund last
If your retirement fund is your main source of income in retirement, you need to consider how you can provide a sustainable income. An annuity will provide a guaranteed income for life, but for drawdown you need to assess how much you are taking out and the investment performance so that you can estimate how long your fund will be able to provide an income. A downturn in investment values combined with withdrawals can damage your future income levels so you need to prepare for such circumstances.
You should be aware of how long you need the income to last. At age 65, men can expect to live 22.2 years and women can expect to live for another 24.1 years on average, but you need to be able to meet income needs beyond that.
Providing for beneficiaries
Retirement funds are treated as outside of your estate for Inheritance Tax purposes, so they can be a good way of protecting your wealth for your beneficiaries.
Remaining funds in drawdown can be passed on to your selected beneficiaries and can be passed on to future generations. An annuity can include a pension for a beneficiary when you die.
There are many options available to you and many things to consider – and you may even look to use a blended approach with annuity and drawdown, but please ask your Origen Consultant to help you understand and explore how to use your retirement fund or to manage your retirement income.
If you are still saving for retirement, take a look at
Or to find out more about investing and the risks
But don’t forget our Guide to retirement options which gives you an overview of the retirement income options available.
This article is for information only, based on our understanding of legislation and HM Revenue & Customs practice as at June 2017 and is not to be taken as Financial Advice. CA1341 Exp 06/2018
[ Date Posted: 15/06/2017 12:28:03 ]