pensions

Many people hope that, when they retire, they will be able to continue with the same lifestyle they enjoyed previously. Unfortunately, many have not analysed their pension provision closely enough and they may be disappointed.

Pensions are still considered to be a tax-efficient means of saving for your retirement. Our independent financial advice can help you review your pension situation as well as discussing alternative methods of planning for your retirement. Some pension options are described below.

Purchase of an annuity

Buying an annuity means using your built-up pension fund to buy a guarantee of an income for life – known as a pension – from a life company. Before you buy your annuity you can also take the option to receive a tax-free cash lump sum from your pension fund, and use the remainder to exchange for a pension.

The value of your pension income depends on several factors:

• your age
• current interest rates
• the value of your pension fund
• the type of pension you choose
• the insurance company you choose

The level of pension you can receive varies on the type of pension you choose, for example any guarantee periods and beneficiaries' benefits.

With profit and unit linked annuities

As an alternative to buying a conventional annuity there is the option of buying a with profit or unit linked annuity. These work on the same basic principles as conventional annuities, the only real difference is the underlying funds in which they are invested. With a with-profit annuity you will receive a regular income for life. The investment performance of the underlying fund is reflected in the bonuses the annuity provider declares each year. This helps to smooth out the ups and downs in the investment returns. However with a unit-linked annuity you will receive a regular income that is directly dependent on the investment returns of the chosen funds. This means that the income can go down or up, depending upon the performance of the underlying investment. It is therefore a slightly riskier option, but it does have a higher potential for growth than either a conventional annuity or a with profits annuity.

As with any annuities, on death your beneficiaries may continue to receive a pension or even the remainder of any guaranteed instalments as a lump sum. This depends on options selected at the outset and cannot be changed.

Phased retirement

This option allows you to make the most tax-efficient use of your pension income. It also allows you to build up the value of your pension fund. Your pension fund is split into 1000 equal segments and these segments can be phased in over a number of years until age 75. Every time you phase in some segments you can choose to receive a tax-free cash lump sum of up to 25% of the value of these segments, and the remainder of the fund will be used to buy an annuity. The remaining segments will continue to be invested in a tax-efficient manner, thus providing you with the possibility of higher future income. You can decide when you wish to phase in your segments. Each segment phased in will provide the option of another tax-free cash lump sum, and will increase your pension income by the value of another annuity you have bought. This will continue until all your pension fund has been used up.

Income drawdown

These schemes are usually commenced to allow you to defer the purchase of an annuity whilst drawing an income from the fund. You are also allowed to take a tax free lump sum from your fund and the remainder of the fund is used to provide an income between minimum and maximum amounts allowable. In the event of you choosing this route, you would be able to take up to 25% of the fund as tax-free cash. You could also draw an income between the minimum and maximum limits allowed by the government, and leave the fund with potential to grow, which in turn could lead to a greater income in the future. When the time comes to purchase an annuity the rate offered may be lower than the rates available now.