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Fraser Heath News

By Mark Fletcher 07 Jul, 2016
Before 6 April 2015, a 55% tax charge was levied on the pension fund of any investor who died while drawing income from their fund under a drawdown contract.

Now, such lump sum payments on death are tax-free if the death occurs before age 75. If later, the beneficiaries will be subject to tax at 45% if the death occurs in the tax year 2015/16 and at their marginal tax rate thereafter.

Those inheriting pension benefits on the death of the investor are in the same position, tax-wise, as the investors themselves. So on deaths before age 75 the benefits can be passed on with no tax charge, from one generation to the next.

The freedom from ‘death tax’ of pension benefits passing after 6 April 2015 is subject to the condition that the beneficiary must either move into ‘flexi-access’ drawdown or take a lump sum payment within two years of the death.

If the intentions of investors and those who inherit pension benefits are to be realised, it is vitally important that they should make clear to the trustees of the pension fund whom they wish to benefit. This is done by filing a ‘nomination’ form with the trustees, which should ideally be accompanied by a ‘letter of wishes’, containing more detailed information such as the effect of any changes in circumstances.

However, births, deaths, marriages and divorces cannot be anticipated and may well affect the choice of beneficiaries. Consequently, nominations and letters of wishes should be reviewed and up-dated regularly.

These two forms of instruction to trustees and not, however, binding, and trustees have an ultimate discretion. If they were binding, they might override the provisions of a Will and result in a tax charge on the beneficiaries.


By-passing the spouse


Before the ‘pension freedoms’ were introduced, it was common practice for pension holders with reasonably substantial pension pots to divert their pension rights away from their surviving spouse if that person had no need of the money and it would be more tax-efficient to pass it directly to children or other dependants. This was done by setting up a ’spousal by-pass trust’.

The fact that pension assets can now be passed between generations free of inheritance tax has caused many people to assume that such trusts will no longer be required. However, they do have their uses, which arise out of the discretion enjoyed by the trustees when distributing benefits.

For example, in the case of second marriages, the interests of children of the first marriage could be protected. Equally, benefits could be withheld from bankrupts or those going through a divorce or in circumstances where means-tested benefits might be affected.

The trust will be effective to divert funds away from the surviving spouse, but it is the nomination and letter of wishes which influence the selection of beneficiaries.

Reducing pension allowance


One of the issues confronting the Government as a result of the new pension freedoms is that people might be tempted to use the income they receive from their pension to make additional contributions, on which they would receive tax relief for a second time.

The annual allowance for pension contributions currently stands at £40,000 p.a., but in order to limit people’s ability to ‘recycle’ pension income, the Government has decreed that in circumstances where any income is drawn from a pension fund under the new ‘flexi-access’ provisions, the allowance will reduce to £10,000. This is referred to as the Money Purchase Annual Allowance (‘MPAA’).

MPAA will not affect ‘capped drawdown’ arrangements, under which the income which can be drawn is restricted by the Government with a view to ensuring that investors do not exhaust their pension pots prematurely.

Also unaffected by MPAA are the investment of tax-free cash from a fund and the application of drawdown funds to purchase an annuity.

Targeting high earners


A proposal from the coalition Government which has been carried forward onto the Conservatives’ agenda is that tax relief on pension contributions should be curtailed for those earning over £150,000 p.a..

Under the proposal, the £40,000 annual allowance would be reduced by £1 for every £2 of income over £150,000, until, for an income of £210,000 the value of the allowance would reduce by £30,000 to £10,000.




By Richard Ellis 07 Jul, 2015

Nominating pension benefits


Before 6 April 2015, a 55% tax charge was levied on the pension fund of any investor who died while drawing income from their fund under a drawdown contract.

Now, such lump sum payments on death are tax-free if the death occurs before age 75. If later, the beneficiaries will be subject to tax at 45% if the death occurs in the tax year 2015/16 and at their marginal tax rate thereafter.

Those inheriting pension benefits on the death of the investor are in the same position, tax-wise, as the investors themselves. So on deaths before age 75 the benefits can be passed on with no tax charge, from one generation to the next.

The freedom from ‘death tax’ of pension benefits passing after 6 April 2015 is subject to the condition that the beneficiary must either move into ‘flexi-access’ drawdown or take a lump sum payment within two years of the death.

If the intentions of investors and those who inherit pension benefits are to be realised, it is vitally important that they should make clear to the trustees of the pension fund whom they wish to benefit. This is done by filing a ‘nomination’ form with the trustees, which should ideally be accompanied by a ‘letter of wishes’, containing more detailed information such as the effect of any changes in circumstances.

However, births, deaths, marriages and divorces cannot be anticipated and may well affect the choice of beneficiaries. Consequently, nominations and letters of wishes should be reviewed and up-dated regularly.

These two forms of instruction to trustees and not, however, binding, and trustees have an ultimate discretion. If they were binding, they might override the provisions of a Will and result in a tax charge on the beneficiaries.


By-passing the spouse


Before the ‘pension freedoms’ were introduced, it was common practice for pension holders with reasonably substantial pension pots to divert their pension rights away from their surviving spouse if that person had no need of the money and it would be more tax-efficient to pass it directly to children or other dependants. This was done by setting up a ’spousal by-pass trust’.

The fact that pension assets can now be passed between generations free of inheritance tax has caused many people to assume that such trusts will no longer be required. However, they do have their uses, which arise out of the discretion enjoyed by the trustees when distributing benefits.

For example, in the case of second marriages, the interests of children of the first marriage could be protected. Equally, benefits could be withheld from bankrupts or those going through a divorce or in circumstances where means-tested benefits might be affected.

The trust will be effective to divert funds away from the surviving spouse, but it is the nomination and letter of wishes which influence the selection of beneficiaries.

Reducing pension allowance


One of the issues confronting the Government as a result of the new pension freedoms is that people might be tempted to use the income they receive from their pension to make additional contributions, on which they would receive tax relief for a second time.

The annual allowance for pension contributions currently stands at £40,000 p.a., but in order to limit people’s ability to ‘recycle’ pension income, the Government has decreed that in circumstances where any income is drawn from a pension fund under the new ‘flexi-access’ provisions, the allowance will reduce to £10,000. This is referred to as the Money Purchase Annual Allowance (‘MPAA’).

MPAA will not affect ‘capped drawdown’ arrangements, under which the income which can be drawn is restricted by the Government with a view to ensuring that investors do not exhaust their pension pots prematurely.

Also unaffected by MPAA are the investment of tax-free cash from a fund and the application of drawdown funds to purchase an annuity.

Targeting high earners


A proposal from the coalition Government which has been carried forward onto the Conservatives’ agenda is that tax relief on pension contributions should be curtailed for those earning over £150,000 p.a..

Under the proposal, the £40,000 annual allowance would be reduced by £1 for every £2 of income over £150,000, until, for an income of £210,000 the value of the allowance would reduce by £30,000 to £10,000.
By Mark Fletcher 14 May, 2015

Post-election planning

Investors were clearly relieved that the result of the election meant that pro-business policies would be maintained and personal aspiration continue to be encouraged.

There are good reasons to be cheerful. One of the Conservatives’ pre-election promises was that there would be no increase in income tax, National Insurance or VAT during their term in office, and a commitment was also made that the tax-free personal allowance would be increased from the current £10,000 to £12,500 by 2020.

In addition, the higher rate tax threshold, above which 40% income tax becomes payable, is to be increased from its current £42,385 to £50,000, again in the longer-term.

There could also be good news on the inheritance tax front. The Conservatives’ pledge has been to take most people’s homes out of the charge to inheritance tax by increasing the tax-free allowance enjoyed by married couples and civil partners from £650,000 (£325,000 for each partner) to £1 million (£500,000 each).

It is not yet clear how this might be done, but one possibility would be to provide an extra allowance of £350,000 (£175,000 per partner) to set against the value of their home.

The recent dramatic changes to pensions taxation are less likely to be disturbed than if a government of a different hue had come to power, though further restrictions on contributions by higher earners are being mooted and sceptics are already wondering whether the new ability to cascade pension wealth down through the generations, free of inheritance tax, will be permitted to continue indefinitely.

One of the more recent proposals was that people who had already bought pension annuities should be allowed to sell these to a commercial third party in exchange for cash or a more flexible income. This proposal is subject to consultation, but the proponent of the change was Steve Webb, a Lib Dem minister who has been deposed, and there may now be some question as to whether it will go ahead.

As far as investments are concerned, two major issues overhang the UK stock market, namely the UK’s relationship with the EU and the threat to the integrity of the United Kingdom posed by the Scottish Nationalists.

However, there are again some reasons to be cheerful, in that Officials in both Brussels and Berlin have made clear their wish to retain the UK in the EU, and it might be that a new deal for the UK could leave an independent Scotland out in the cold.

The other cloud on the investment horizon is the effect on the corporate and government bond markets of the withdrawal of the “quantitative easing” stimulus provided by central banks in the wake of the financial crisis. The best answer for the fixed interest element in a portfolio could be strategic bond funds, which can switch between market sectors both in the UK and internationally.


Tax on pension withdrawals

Concerns have been raised over the taxation of lump sum pension fund withdrawals over and above the 25% tax-free allowance. Unless the planholder supplies to their pension provider a P45 form obtained from their employer, HM Revenue and Customs will apply emergency coding which will assume that payments of the same magnitude will continue to be made on a regular basis and tax calculated accordingly.

The overpaid tax would usually be reclaimed subsequently through self-assessment or PAYE, but HMRC has now issued a new form P55 which should ensure that repayment is made within 5 working weeks. Despite confusion over the wording of this form, it has been established that it can be used when more than one lump sum withdrawal is made during the course of a year.


Tax on disposal of businesses

Subject to complying with a number of conditions, small business owners who sell their businesses may be entitled to Entrepreneurs’ Relief on any profit made on the sale, which would reduce the capital gains tax charge from a potential 28% to 10%.

If, instead of selling out, the business owner were to transfer the shares in the business within the family – perhaps to a son or daughter – the value would be subject to capital gains tax, but this could be deferred by claiming “holdover relief”, which would permit the profit to avoid tax until such time as the shares might be sold on by the family member, when tax would be payable on the accumulated gains.

If the owner were to die within seven years of making the transfer, Inheritance tax might potentially be payable, but in the case of a sole owner of shares in an unquoted company, 100% ‘business property relief’ should be available.

If so, then provided that the transferee retains the shares until the death of the original owner and provided that the shares still qualify for relief, no inheritance tax would be payable.

The other option would be for the owner to leave the shares to the family member in his or her Will. Again, business property relief should be available to eliminate any charge to inheritance tax; and for the purposes of capital gains tax the value would be re-set at the date of death, with previous gains ignored.

Finally, if instead of transferring shares within the family the owner were to sell the shares and invest the proceeds in a fund or company which qualified for business property relief, for example an investment in the Alternative Investment Market (‘AIM’), this investment would become exempt from inheritance tax after two years.

By Richard Ellis 23 Mar, 2015
Highlights of the budget 2015 from a financial planning perspective.

Please click here for update.
By Richard Ellis 21 Oct, 2014

The Taxation of Pensions Bill lays out the framework for 2015's new flexible era. There are no great surprises.  But it still contains several changes from the earlier draft which are worthy of note. Here are ten key points of interest:


55% tax charge on death

The Bill carries through on the promise to scrap the 55% tax charge levied on the pension fund on death in drawdown. The tax charge has been cut to 45% and importantly now only applies where death occurs after the age of 75 where benefit is taken as a lump sum. The charge will  also be levied on value protected annuities and pension protection lump sums from Defined Benefit schemes.

Capped drawdown retains £40,000 annual allowance

Anyone already in capped drawdown before 6 April 2015 can continue to make pension contributions up to the £40,000 annual  allowance. This relies upon them staying within the current maximum pension income limit and not accessing the new flexibility.

Accessing the new flexibility or entering drawdown after April 2015 through a separate arrangement will see the annual allowance cut from £40,000 to £10,000. We are shortly writing to clients over the age of 55 that have the ability to enter capped drawdown before April 2015 and want to retain the current £40,000 allowance for pension contributions.

Capped drawdown transfers

Where someone transfers their capped drawdown fund to a new provider they can retain their £40,000 pension contribution allowance.  If they wish to access the new flexibility following transfer they can notify the receiving scheme that the funds  are to be deemed 'newly designated', i.e. be classed as flexible-access. However, this would see their pension contribution allowance cut to £10,000.

£10,000 reduced annual allowance

A reduced pension contribution allowance of £10,000 applies when someone accesses the new flexibility of uncapped income. The Bill includes three new events which would see the annual allowance cut:
  • taking out a 'flexible annuity' which allows or could be varied to allow decreases in the amount of annuity (over and above the existing rules on decreases to lifetime annuities);
  • becoming entitled to a scheme pension from a money purchase scheme where there are fewer than 11 other people  entitled to payment of scheme pension under the scheme.
  • someone with primary protection taking a stand alone lump sum.

Pension Credits

The Bill confirms that an Uncrystallised Funds Pension Lump Sum (UFPLS) cannot be paid from a disqualifying  pension credit. This is a pension credit paid as a result of divorce and where the credit has come from a pension in  payment and from which tax free cash has already been taken. These pension credits are fully taxable to prevent anyone getting two bites at the tax free cash cherry.

At Fraser Heath we have a   Resolution Accredited Divorce Specialist   that can assist with the technical aspects of pension sharing on divorce.

Tax free cash recycling

Rules exist to prevent someone from taking tax free cash from their pension and making a fresh pension contribution which attracts tax relief. The original draft Bill amended the current 1% of lifetime allowance figure (used to measure the amount of tax free cash paid within a 12 month period) to £10,000. This is now been cut further to £7,500.

Triviality and small pots

Further relaxation has been given to the payments under triviality and small pots rules. The minimum age under which such pensions can be taken as a lump sum has been reduced from 60 to 55 (or earlier if under ill-health rules).

Valuing pre April 2006 pensions in payment

Pre April 2006 pensions in payment are valued for the lifetime allowance purposes at the date of the first post A-Day Benefit Crystallisation Event (BCE). For those in drawdown this is changing from 25 x the maximum capped drawdown income, to 25 x 80% of the maximum capped drawdown. This will counteract the effects of the increase in the income limits brought about in March 2014 from 120% to 150% GAD.

Those expecting to breach the Lifetime Allowance of £1.25m with their first crystallisation event since A-Day may wish to defer taking benefits until the new calculation method is in place. This will be effective where the first BCE event occurs on or after 6 April 2015. Originally this was intended to apply from the first BCE after the Act was passed.

Protected low pension ages

Restrictions on transferring pensions with a protected low pension age are to be lifted. It will be possible to transfer to a new scheme and continue taking income while still below age 55, without it being part of a block transfer.

Temporary non-residence rules

Rules already exist to prevent someone becoming temporarily non-UK resident and drawing their pension benefits in large chunks to escape UK tax.  For example, currently someone in flexible drawdown drawing the benefits while non-UK resident and then returning to the UK may be subject to UK income tax if they return to the UK within 5 tax years.

The Bill expands the rules to include the new flexible income options and now also includes 'flexible annuity' and 'money  purchase scheme pensions'. And imposes a tax charge on the return to the UK within 5 years where withdrawals while non-resident have exceeded £100,000.


Summary

The new pension rules create a great deal of flexibility for anyone with pension savings and are extremely positive from a financial planning perspective. However, there are a few pitfalls that unwittingly people without the appropriate advice may fall foul of which could result in a financial loss and/or loss of ability to mitigate tax through pension contributions.

Please   contact Fraser Heath   for an evaluation of your financial position and further information regarding any of the proposed changes to pensions.

The above information is based on our understanding of the new rules as at 20 October 2014. Individual advice should always be sought before taking action in respect of your pensions.

E&OE
By Richard Ellis 12 Aug, 2014
Our August 2014 Newsletter has now been published and is available to download. Clients will receive a hard copy in the post over the next few days.  

Download Newsletter Here
By Richard Ellis 28 Nov, 2013
From 6th April 2014 HMRC reduces the Lifetime Allowance from £1.5m and lump sum rights of £375,000 to £1.25m and lump sum rights of £312.500 with tax penalties of 25% on income and 55% on cash benefits taken in excess of the Allowance, at retirement.

Similar to previous reductions to the Lifetime Allowance, HMRC has introduced two forms of protection namely   Fixed Protection 2014   and   Individual Protection.

When considering whether or not benefits are close to the lifetime limit, individuals would need to consider:
  • multiples of 25 x defined benefit (pre April 2006)  
  • multiples of 20 x defined benefit pensions (post April 2006)
  • pension commencement lump sums
  • Money purchase fund values

Fixed Protection 2014

Protects benefits at the current level of up to £1.5m but no benefit accrual is permitted after 5th April 2014.  Benefit accrual can include:
  • Defined Benefit scheme accrual above ‘relevant accruals’
  • Money Purchase contributions
  • Auto Enrolment to a Workplace Pension
  • Could extend to membership of Life assurance schemes for Death in Service, dependent on whether or not the scheme is part of the Defined Benefit scheme and if the contract was established before April 2006

You must apply on-line to HMRC for Fixed Protection by 5th April 2014. On-line applications can be made from November 2014 but we understand there has been some delay in receiving acknowledgment from HMRC.


Individual Protection

This form of protection allows contributions and benefit accrual after 5th April 2014 without losing protection.  Pension savings in excess of the protected allowance will attract a lifetime allowance tax charge. More details have yet to be made available but guidance so far is:
  • Pension Benefits must be valued at £1.25m or more at 6th April 2014
  • Enables protection of benefits between £1.25m to £1.5m
  • No protection above £1.5m
  • Cannot apply until 6th April 2014 and will likely have a 3 year period beyond that during which to apply i.e. 6th April 2017

Annual Allowance and Carry Forward

These changes present opportunity for those currently under the £1.5m value to maximise pension benefit values before 6th April 2014 using the current Annual Allowance of £50,000 gross (reducing to £40,000 from 2013/14) and Carry Forward to utilise the unused maximum Annual Allowance for the previous 3 years.


Protected Before?

If you already have Primary Protection, Enhanced Protection or Fixed Protection 2012 you must seek advice as you are likely to void the existing protection if you apply for Fixed Protection 2014.

If you would like further advice and information on pension protection, please   contact us .
By Richard Ellis 20 Sep, 2013
UK companies that employ between 60 and 250 staff now have only 6 to 12 months preparation ahead of their staging date. If you are a UK employer that falls into this category you would have had a twelve-month reminder letter from The Pensions Regulator (TPR) and you should be well underway in planning towards   Auto Enrolment .

Part of these plans would involve reviewing any current company pension scheme and assessing this scheme against the new requirements to identify any changes that may be needed. If you don't have a pension scheme you will of course need to set one up.

You will also need to assess your workforce to determine which categories your workers fall into under the new pensions legislation and the employer duties that apply to each category.

You will also have had to consider the impact of the costs of   Auto Enrolment   on your cash flow and 2014 budget in terms of the minimum statutory contributions, costs for any associated advice and work carried out to cleanse payroll data and review internal processes.

It is very likely that you would also have considered using Salary Exchange and how this would fit into the   Auto Enrolment   scheme design. At this point you will also have considered a communication strategy to your workforce and whether or not contracts of employment will need to be reviewed. The implementation of these changes and the engagement of your workforce is likely to happen at least six months from your staging date.

In reality we are increasingly speaking with companies that are not yet suitably informed about the changes to their duties to employees and the impact to the business in terms of costs and the work required to comply. This is extremely worrying considering the consequences of getting this wrong. The Pension Regulator (TPR) has already launched 89 investigations into possible non-compliance where employers have struggled with their new duties. Worryingly these 89 cases involved some of the largest companies in the UK which have large management teams, payroll and HR departments. Small and medium sized businesses that do not have these kind of resources will need to be diligent and ensure that they are appropriately informed and advised in order to avoid compliance breaches and in some cases fines.

At Fraser Heath we are currently working with our existing corporate clients to ensure that they meet their regulatory obligations well in advance of their staging date. We have also been approached by professional connections to provide informative seminars to their corporate clients.

The main priority is to ensure that companies act well in advance to avoid capacity issues that will restrict choice and ultimately could mean that business owners are left to deliver an   Auto Enrolment solution   themselves.

If you run a business and you fall within this twelve-month preparation window, my advice would be to ensure you are fully informed and have a workable plan to ensure you comply in advance of your staging date. If you do not have either these things and you would like to understand how Fraser Heath can help   please get in touch .


By Miles Hendy 30 Jul, 2013

The Lifetime Allowance

At present we can all have £1.5M of value in a registered pension scheme. This is known as the Lifetime Allowance. As soon as you crystallise benefits from a pension and go over the Lifetime Allowance you lose the current entitlement to a tax free lump sum on that part and all benefits in excess incur a Lifetime Allowance tax Charge of 55%.

From 6th April 2014 the Lifetime Allowance reduces to £1.25M. It is possible to apply for Fixed Protection 2014 prior to that date which means that providing that you make no further contributions to a pension and do not create a new pension arrangement then you can retain a personal Lifetime Allowance at the £1.5M level.

Pension Credits and HMRC’s Stance with Fixed Protection

HMRC’s stance with regards to Pension Sharing Orders and Fixed Protection   is that if a Pension Sharing Order is implemented in a new arrangement after 6th April 2014 this will break the Fixed Protection and you would revert to a £1.25M Lifetime Allowance. However, providing the Pension Credit is received by an existing arrangement after 6th April 2014 then Fixed Protection can remain in place.

Where a Defined Benefits pension scheme allows the Pension Credit member to become a member of the Defined Benefits scheme in their own right, receipt of the Credit after 6th April 2014 could also result in the creation of a new arrangement and the loss of Fixed Protection. If you are in this position you should aim to conclude matters in good time or be left with a conundrum in the new tax year; either apply the Credit to the Defined Benefits plan to enjoy the higher, known income but minus a Lifetime Allowance Charge or transfer the Credit to an existing money purchase arrangement and retain Fixed Protection.

Timescales

It should be kept in mind that negotiations taking place today could well result in the Pension Credit being received after 6th April 2014.

Action Needed Prior to 6th April 2014

Many occupational pension schemes insist on the Pension Credit being transferred to a different plan. It is imperative that where your pension funds will be close to £1.25M after the divorce that you have an existing arrangement that is suitable for receiving the Pension Credit by the end of the current tax year. You also have to apply for Fixed Protection 2014 prior to the 6th April 2014 deadline.

Consequences of Losing Fixed Protection 2014

The consequences to a higher rate tax payer of not applying for or losing Fixed Protection 2014 on the £250,000 between £1.25M and £1.5M are as follows:

Accessing under the Lifetime Allowance (such as using Flexible Drawdown)

  • £250,000 X 25% tax free lump sum = £62,500
  • Remaining fund [£187,500] less 40% income tax = £112,500
  • Total= £175,000

Accessing over the Lifetime Allowance Charge

  • £250,000 – 55% Lifetime Allowance Charge= £112,500

Planning ahead in good time could therefore save £62,500 in tax. The tax saving may be greater than this if the pension holder has some of their basic rate tax band remaining.

A Suitable Existing Arrangement

Even where you have no suitable pension plan currently you can put one in place ahead of time. People with no earned income can make a pension contribution of up to £3,600 gross each tax year. The sum you invest to create the new plan should be sufficiently small to minimise the amount of your pension expected to be over the Lifetime Allowance in the future. However, you also need to be mindful that pension plans suitable for pension funds of this size, such as those that allow Flexible Drawdown, have minimum contribution levels.

As a Pension Specialist, Divorce Specialist and Chartered Financial Planner I would be happy to provide further information or advice if you are effected by this.

By Richard Ellis 11 Jun, 2013

The changing face of retirement


Annuities were designed at a time when retirees typically stopped work on a given date and were mostly looking for a predictable amount of income, guaranteed to be paid for the annuititant's life.

The problem is that this ideal is becoming more expensive to deliver, at least for younger annuitants.

Delaying annuity purchase doesn't mean you can't access retirement income. You could choose an alternative solution, such as income drawdown, to provide an income in the short to medium term and purchase an annuity later on.

There is no guarantee of course that annuity rates will improve but you will be slightly older which would be in your favour.

Some retirements facts

  • The average life expectancy for a man after age 65 has increased by 75% since the 1950s.
  • Annuity rates have fallen for the fifth consecutive year since 2008.
  • Over this period male annuity rates have fallen by 23%*
  • The real value of income can decrease by nearly 50% over 20 years (assuming 3% inflation).

The case for delaying buying an annuity

Although life expectancy is increasing, many people still expect to retire in their sixties, resulting in longer periods in retirement. The longer people spend in retirement the more likely it is that their financial needs will change. It makes perfect sense to consider if it is right for you to commit to a particular annuity shape until your requirements have stabilised.

Annuity rates have recently shown a slight short term improvement which could continue. It would probably be optimistic to rely on this for a number of reasons including gender equality, improving mortality, the growth of specialist enhanced annuities and imminent changes to EU legislation.  However, of more significance is the fact that if you can afford to wait a few years before annuitising, you will be older and this may result in better rates.

You may benefit from enhanced annuity rates at a later date. It has been estimated that up to 60% of people could qualify for an enhanced annuity. The older you are, the more likely this will apply, and it may be worth waiting until it does.

You may want, or need, to keep working. The Office of National Statistics (ONS) figures show that 12% of men and 11.6% of women are still employed at age 65, mostly in part-time roles. This might enable you to take an initially lower level of pension income, which in turn could preserve pension savings to purchase a higher annuity income later.

You may want to manage your income tax bill. Pension income, whether from an annuity or a drawdown plan, is subject to tax. However the latter allows a choice of exactly how much to withdraw in a given tax year.

You may want to maximise death benefits for family and friends. An annuity can be set up to provide a pension to a spouse or financial dependent, but this comes at the cost of a lower initial income. A drawdown plan can provide a lump sum, subject to 55% tax on crystallised benefits, to anyone nominated. This can be particularly advantageous if you are unmarried or do not have children.

You may want to keep saving, and benefit from the tax relief applicable to savings in a pension plan. Especially as funds can be accessed at any time after age 55 if required.

Given the 20-30 year investment horizon applicable to those with average life expectancy, you may want to continue investing for growth. This is most likely to be appropriate if you have other assets which could replace any losses that may be incurred.


The conventional annuity is still very likely to be the appropriate solution if you want to take the maximum level of guaranteed retirement income. The above factors cannot be ignored and all of your options should be carefully considered before making such an important decision.


If you'd like to discuss income drawdown and your retirement options in more detail,   please contact us to arrange an initial consultation.


* Figures based on a level single life annuity, male life aged 65, guaranteed for 5 years, purchase price £100,000)

Sources:
Department for Work and Pensions. Cohort estimates of life expectancy April 2011.
Retirement Academy report, Spring 2013.
Just Retirement Limited research, Q3 2012.
ONS: Pension Trends Chapter 4:The labour market and retirement, 2013 edition.
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