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New ways to generate retirement income

This article is part of
Guide to Boosting Retirement Income

With providers so far failing to develop any radical new products, most other “new” ways to turn pension cash into retirement income existed prior to 6 April, but have gained greater prominence and been tweaked to fit the new ‘free’ world.

Taxing cash decisions

The only genuinely new way of generating a retirement income is the ability to take cash without limits. Retirees can take the whole pot at 55, or take ad hoc lump sums, most obviously through the new uncrystallised fund lump sum option.

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Of course, most would continue to use the 25 per cent tax-free lump sum that becomes available when they hit 55, the rules around which have not changed for those going into drawdown. Uncrystallised fund lump sums would include a 25 per cent tax-free portion in each payment.

Those seeking to take cash need to be aware of the downsides, namely that they could run out of money if the withdrawal plan is not carefully managed and that they could face hefty tax charges. All new withdrawals will be hit with emergency taxes initially and are generally taxed as income.

But taking cash sensibly and utilising tax-free allowances enables clients to manage their tax bills by changing their income levels to accommodate other sources of income, some experts argue.

For example, Jamie Jenkins, head of pensions strategy at Standard Life, says a client who reaches state pension age and takes their state pension can tailor the income from their private pension to ensure they don’t fall into a higher tax bracket.

They can also use the £5,000 savings band, which Mr Jenkins points out can effectively give them £15,600 income tax-free. When the capital gains tax allowance of £11,100 is added to this Mr Jenkins says it becomes £27,700 tax-free per person.

That said, Mr Jenkins says it does require active management from year-to-year, and the cost that comes with this approach, particularly where a client has a range of assets as the tax treatment differs.

He says the tax implications of taking money out of the pension wrapper need to be carefully considered. Further details on how tax ramifications should be explored by advisers can be found in the next article in this guide.

Other savings

If a client wishes to, they can invest in other savings vehicles as an alternative to a pension.

It is hard to get away from the fact that the more an individual saves, the more retirement income they will have to work with, Alistair McQueen, head of policy and compliance business protection at Aviva, points out.

This fundamental principle is not changed if someone saves in a pension, a saving account, an Isa or other savings vehicle, he notes.

A pension requires a client to ‘lock away’ their money until they are at least 55. An attraction of a pension, however, in comparison to the other methods of saving is that the client benefit from the application of tax relief on all saving contributions.

Also, if they are saving in a workplace pension, Mr McQueen notes it is most likely they will also benefit from an additional contribution from their employer.