There is an understanding among many clients that the pension reforms have introduced far more options for funding retirement.
Many of these can be used alone or in combination with other pension products, while some may be more suited to those in the early years of retirement, to be replaced by another product when they get older.
Understanding what the client’s needs will be when they retire and the type of pension they have been saving into throughout their life, will naturally whittle down the most suitable product for them.
Scott Gallacher, chartered financial planner at Rowley Turton, lists the range of pension products available:
- Fixed Term Annuity
- Drawdown (existing capped and new flexible)
- Uncrystallised Funds Pension Lump Sums (UFPLS)
- And a number of phased variations or combinations of the above.
In itself, drawdown is not a new concept, as Gareth James, head of technical resources at AJ Bell, reminds people.
“It is important to remember that drawdown has been allowing savers to alter the amount they take from their pension for more than 20 years. What has changed is the complete removal of government set income limits, and drawdown being seen as a viable option by many more savers than was the case pre-freedoms,” he explains.
Old product, new tricks
Among that list is an entirely new product though.
Mr James notes: “Uncrystallised Funds Pension Lump Sums (UFPLS) is the one completely new option which has taken off.
“This is simply where savers take ad-hoc lump sums directly from their pension rather than setting up a regular income stream. A quarter of each UFPLS withdrawal is tax-free, with the rest taxed at the saver’s marginal rate.”
He observes: “UFPLS has been particularly popular with those holding more old-fashioned pensions which don’t offer drawdown as an option, as it is their only way to make use of the freedoms without transferring to a new provider.”
Fiona Tait, technical director at Intelligent Pensions, outlines three main retirement options for individuals with defined contribution (DC) pension plans, ranging from “the extreme option of taking it all in one go at outset, to the more traditional route of spreading it as income across the remainder of their lives”.
She says: “UFPLS may be used to achieve the former approach, or to provide a series of tax-efficient lump sum withdrawals over time; while Flexi-Access Drawdown (FAD) and annuities may be used to provide regular income.”
Then there is the ability to combine some of the options.
“These options may also be used in combination either sequentially or in tandem; commonly FAD or UFPLS will be used earlier in retirement to maintain flexibility, while an annuity may be used later on when income needs are more predictable,” she points out.
“UFPLS and FAD are not available to members of defined benefit (DB) arrangements and members of those schemes have to transfer to a DC arrangement in advance of taking benefits, if the benefit of having the additional flexibility outweighs the advantage of the guarantees that apply to benefits withdrawn from a DB scheme.”