Annuity Pension - Do I have to buy an annuity when I retire?

A common complaint from a lot of people reaching retirement age, especially those fortunate enough to have substantial funds, is “do I have to buy a pension now and what happens to the money if I die?”.

It is understandable that anyone who has invested substantial sums into a pension throughout their lifetime, should be concerned about the previous two questions. So let’s deal with these now.

When you reach retirement age, as explained in previous posts, you will be faced with a number of choices which could have a substantial impact on your eventual income. In my previous posts I have only as yet dealt with the annuity options, but there is currently another option available, referred to as “Income Drawdown”.

This is an alternative to the compulsory purchase annuity, although this option is open to anyone, it is better suited to those with a large fund, normally in my view in excess of £150,000 and it may not be suitable for everyone for various reasons, which I will deal with in future posts.

The answer to the first question therefore is No you do not necessarily have to buy a pension now.

In answer to the second question, if you have purchased an annuity, you have given up control of your pension fund in return for an income paid for your lifetime and possibly that of a spouses lifetime if you should pre-decease her or him if. There may also be a guaranteed period included.

If however you choose the Income Drawdown route instead of annuity purchase, you need not buy an annuity until you reach age 75, which means you can keep control of the pension fund up to age 75 and in the event of your death before age 75 the remaining fund would be available for distribution to your spouse or dependents.

Income Drawdown is a fairly complicated concept, but in my view is a very flexible retirement planning vehicle and should not be overlooked, especially for those with larger pension funds and who have access to other income or capital.

I would recommend that anyone considering this as a retirement option should always seek Independent Financial Advice to ensure that they fully understand the implications before proceeding.

I will be looking at the advantages, disadvantages and the workings of Income Drawdown in more detail in my next few posts, so if this is of interest please join me.

Increase Pension Income by Paying Less Tax!

It is sometimes said that “tax is a levy on the ill-informed”. In my experience I have certainly found this to be true of most people I had dealings with, due mainly to a lack of understanding of the tax system, which is quite understandable but also to a kind of apathy.

Most people have a tendency to put off what they dislike or are uninterested in, such as tax returns. Unfortunately this can quite often lead to them paying tax unnecessarily, with the knock on effect of reducing income, possibly at a time when it is most needed.

In retirement it is essential that you maximise every available pound to ensure that you have as much net income as possible to spend. Tax savings can, and should, form a major part of your retirement planning strategy.

Throughout my career I was able to help a great many clients obtain tax rebates and pay less tax, by just simply being aware of how the system works and what benefits were available.

An example of this applies to retired self-employed individuals who are receiving fairly modest levels of income via a state pension and personal pension or retirement annuity.

In this situation the state pension is being paid gross (no income tax is deducted), but the personal pension or retirement annuity has tax deducted at the basic rate by the pension company as directed by the revenue.

In some instances it may be that after taking into account the individuals personal allowances (amount of income that can be earned before tax), they have in fact paid more tax than should have been paid via their pension plan.

By making a claim to the revenue to re-assess the situation, it may be possible to claim this overpaid tax back and to revise the future tax collected. If an initial claim is accepted by the revenue it may then be possible to carry out this exercise for the previous 6 years.

In some instances I was able to reclaim from the revenue on behalf of client’s hundreds and even thousands of pounds in overpaid tax, certainly worth the effort.

If you think you are paying to much tax it is your responsibility to inform the revenue and provide the necessary information in support of a claim. Don’t think that the revenue will tell you, it just won’t happen.


Please join me in my next post for more ideas on maximising income in retirement.

Tax Free Cash - Which is better, Retirement Annuity or Personal Pension!

Personal Pension (PP’s) became available from July 1988 to replace the Retirement Annuity Policy sometimes referred to as an (RAP). Although it was not possible to effect another RAP after July 1988, it was still possible to continue with an existing plan.

For many people there where some distinct advantages, such as the ability to invest significantly larger premiums than could be invested into a PP on which taxrelief could be obtained.

With regard to the Tax Free Cash (TFC), it was generally considered that the TFC available under an old RAP would be greater than that provided by a Personal Pension.

The amount of TFC available from a PP is simply 25% of the accumulated fund value at retirement. Therefore if the fund is valued at £100,000 the TFC would be £25,000 and the remaining £75,000 would be used to purchase a pension annuity.

In contrast the TFC available from an RAP is based on a rather complex calculation which only the Revenue or an Actuary could devise. The TFC is  based on 3 x the residual annuity ( the annuity which can be purchased with the remainder of the fund after TFC has been taken). This generally resulted in a TFC figure of up to 30% of the fund depending on the retirement age.

Unfortunately due to reduced current annuity rates the level of tax free cash available from an RAP has declined and may now be actually less than that available from a PP.

There are also other factors that need to be taken into account when deciding which option is best, such as the age at which retirement benefits are taken as normal retirement ages for an RAP are between 60 and 75, compared to 50 and 75 for a PP.

Early retirement (from age 50) can be achieved by transferring from an RAP to a PP, but the TFC will then be restricted to 25% of the fund.

You can therefore see that there is no clear cut solution to which is better and it is essential that if you have an RAP, you compare the various options available to you before making a final decision. I would strongly recommend that you seek independent financial advice in this respect. 

Join me in my next post for more ideas on maximising income in retirement.

Pension Annuity - Purchased Life Annuity a Less Taxing Option!

A pension annuity is treated as earned income for tax purposes and is therefore taxed at your highest rate of tax when combined with any other income you receive. When looking at your income needs in retirement you should always focus on the net income received after tax as this is what you will have available to spend.

If your main requirement in retirement is for maximum income and you have no immediate need for additional capital, you may wish to consider using all or part of your tax free cash to increase your income by purchasing a Purchased Life Annuity.

A Purchased Life Annuity (PLA) differs from a Pension Annuity in that it can be purchased by anyone. It is not compulsory purchase as is the case with a pension annuity, which has to used to by an annuity from the proceeds of a pension fund.

Because of this the Revenue deem that the purchase of a PLA is paid for out of already taxed capital and they therefore treat the resulting income as a part repayment of capital and interest and only require tax to be paid on the interest element as unearned income.

This means that the net income received from a PLA will be higher than that received from a pension annuity. The amount of increase will depend on the age at which it is purchased and the personal tax rate of the individual. The older the individual and the higher the personal tax rate the larger the increase in net income realised.

It is also possible to include similar options to those provided under a Pension Annuity with the added benefit of being able to include a Capital Protection Option where the initial capital invested, less any gross income paid, can be repaid to the purchaser’s estate on death, which is not available under a Pension Annuity.

The PLA is a very under used option, mainly due to people being reluctant to give up control of the capital, but with current saving interest rates being so low it is certainly worth considering.

In order to see if this option would be beneficial to you it would be necessary to obtain quotes from various annuity companies and calculate the net income you would receive based on your actual personal tax situation to see how it compares to any other form of investment available.

As this option is not a compulsory purchase the decision to buy a PLA can be taken at any time and does not necessarily have to be made at the time of retirement.

Please join me for my next post when I will be looking at the Tax Free Cash.

Pension Annuity - Where you live could make a difference!

Your occupation and the area in which you live could make a difference to the amount of pension payment you receive. Some pension annuity providers will take into account your occupation and geographical location when assessing your pension annuity.

This is because if you happen to live in say Wales or Nottinghamshire and have worked as a coal miner or in heavy industry, they would consider that this may effect your life expectancy as compared to say a Stockbroker living in Surrey.

This is not in anyway a slight against where you live or what you do, but an actuarial calculation based on statistics, which indicate that life expectancy is effected by geographical location and occupation.

But whatever the reason it could be beneficial if it increases your initial pension payments.

In the same way if you smoke, or have smoked cigarettes in the near past, you could also benefit from an increase in initial pension payments.

To find out if you qualify you would have to complete a lifestyle questionnaire and this may also be applicable to a spouse if he or she is to be included in your pension annuity choice.

Join me in my next post when I will be looking at a tax efficient pension option.

Annuity Purchase - What are Impaired Life Annuities!

As I have explained in my previous posts a pension annuity is based primarily on life expectancy (how long you are likely to live). If you suffer or have suffered from health issues that may effect your life expectancy, it may be possible to obtain what is referred to as an Impaired Life Annuity.

This type of annuity recognises that your condition may mean that your life expectancy is likely to be shortened, and therefore will be taken into account when calculating the actual pension offered. This can have the result of significantly increasing your initial pension.

In order to access weather you are entitled to this type of annuity it would be necessary for you to complete a medical questionnaire, in which you would disclose your medical history. The insurer may also request a report from your own General Practitioner (GP), normally referred to as a GPR (General Practitioners Report). This will allow the annuity underwriters to evaluate the risk and make you an offer.

In order to find the best impaired life annuity rate it may be necessary to forward your application to multiple insurers, in which case you will need specialist pension advice.

Not all illnesses will qualify for an impaired life annuity, but some of the most common that may be considered are as follows:-

• Heart Conditions
• Cancer
• Multiple Sclerosis
• High Blood Pressure
• Diabetes
• Stroke
• Chronic Asthma
• Emphysema
• High Cholesterol
• Overweight
• Smoking

Some people are reluctant to ask for pension advice, thinking that it may be to expensive, but in reality this is not necessarily the case and is usually a false economy.

Normally the services of a pension specialist will be funded by the insurer as part of the marketing costs. The additional income you receive should more than justify any additional costs incurred.

Pensions in general is a very complicated and specialised field and in my opinion anyone reaching pension age should enlist the help of a pensions advisor, preferably someone who has both qualifications and experience advising on pensions.  

Making the wrong decisions at this time of life could be extremely costly and virtually impossible to put right.


Please join me in my next post when I will continue to explain some more annuity options.

Pension Annuity - The Hidden Gem!

If you have Retirement Annuity or Personal Pension that was started in the 1970’s or 80’s, it may be hiding a little Gem.

 
Some of the earlier Retirement Annuity or Personal Pension contracts included an annuity guarantee within the policy conditions, which under certain circumstances guaranteed the pension rate payable as a percentage of the fund value.

For example it may guarantee to convert the fund value into a pension payment at retirement on a 11:1 or 9:1 basis. This means that for every £100 of fund accumulated at retirement age you could elect to receive either £11 or £9 pa in pension.

When compared to current annuity rates this may prove to be a very attractive proposition and could indeed be considered a ‘hidden gem’.

Normally when these guarantees are provided they are very specific about selected retirement age and limit the options available.

I would recommend that if you have one of these contracts that you read the original policy document carefully to see if any of these options are mentioned. If you are unsure of the policy conditions or find it difficult to understand you should consult a pension specialist before making any final decisions.

Tune in to my next post to find out more about maximising your retirement income.