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Retirement income options from April 2015

This article is part of
Guide to The Brave New Pensions World

Annuities

Individuals who opt for an annuity can still make tax-relievable pension contributions up to £40,000 a year.

New flexible annuities may also be developed as the government has relaxed rules on what this type of product must deliver, including longer guarantee periods and the ability for income to decrease.

Payments from a flexible annuity limit tax-relievable contributions to £10,000 a year.

In terms of what happens to the pot on death before the age of 75, and if a joint life annuity was purchased, the annuity payments will be made tax free.

While the new flexibilities will offer the opportunity for products to be launched that better reflect the new, flexible pension climate, what puts many off annuities is the decision to purchase one is irrevocable.

Unless the customer bought a dependants pension, David Macmillan of Aegon points out the pension dies with you, so there is limited opportunity to pass on funds to loved ones.

Drawdown

Turning to drawdown, the new simpler flexi-access income drawdown allows people to manage their income throughout retirement, giving control and flexibility.

People can take as little or as much income as they like and flexi-access drawdown gives people the ability to manage their income tax position.

With flexi-access drawdown funds continue to be invested – so there is the potential for investment growth. Unused funds at date of death can be passed on to loved ones with flexi-drawdown.

If death is before the age of 75, dependants pay no tax on the lump sum or income, allowing funds to be passed down the generation tax-free up to the lifetime allowance. Over age 75 the fund is passed on free but income will be taxed at marginal rates.

Ultimately flexi-access income drawdown allows flexibility, so by using this option you leave the door open to purchase an annuity with unused funds at a later date.

Cash can therefore be ring-fenced to use to pay for things such as long term care costs. On the downside, there is a risk that people can run out of funds if they drawdown too much.

Online tools could help with flexi-access income drawdown, but Aegon’s Mr Macmillan points out advice may be needed.

Ultimately this option may not be suitable for everyone, as some savers may not have the risk appetite or their pension pot may be too small.

As income drawdown is classed as a flexible product, once an individual has taken more than the tax-free cash sum of 25 per cent, Mr Macmillan says future tax-relievable contributions are limited to the new money purchase annual allowance of £10,000 a year, instead of £40,000.

Cashing in

People can cash in their entire pension pot, or receive ad-hoc payments with 25 per cent of each payment is tax-free, an option known as the ‘uncrystallised fund pension lump sum’.