I am due to retire in June 2004 at 60. I am a member of a pre1987 money-purchase pension plan insured with Scottish Widows, with earnings above the cap. The benefits are held within its with-profits fund and I am eligible for a guaranteed annuity. The guaranteed annuity is at a rate of £98.02 annuity per £1,000 cash fund. It is guaranteed for five years but is single-life only. I am in good health, married and have three children, all of whom have left home and are working. What options do I have?
Where a Scottish Widows guaranteed annuity does not provide for any spouse's benefits, it does allow you to accommodate this within the guaranteed annuity. The method used is to consider the overall value of the pension plan, deduct from this the amount required to secure the required level of spouse's benefit using current market rates and apply the guaranteed annuity rate to any remaining fund.
This will reduce the actual overall rate from the guaranteed level of £98.02 but should still represent good value compared with open-market rates of around £58 per £1,000 for a joint-life pension reducing to two-thirds on your death (wife assumed to be three years younger).
Another factor to consider is any windfall payments you may have received into the pension fund or increases in contributions made after Scottish Widows removed its guaranteed annuity rates. Oldertype plans issued by Scottish Widows contained guaranteed annuity options on with-profits benefits bought by single and regular contributions paid before July 1, 1999. Any increases to with-profits contributions since that date did not receive the guaranteed annuity option and this would include any windfall payments to the plan.
I assume that you are considering taking tax-free cash. It is possible to arrange for Scottish Widows to utilise all or part of the fund which is not covered by the guaranteed annuity to provide you with your tax-free cash sum, ensuring that you can still take full advantage of the guaranteed rates. If you have accumulated more than 20 years' service, you will be entitled to receive one-and-a-half times your full uncapped salary as a tax-free sum. The calculation of final salary will be generally either:
Your basic pay for any year in the five years preceding exit plus fluctuating pay averaged over the previous three or more years or The average of total pay over any three or more consecutive years ending not more than 10 years preceding exit.
Final salary may include most taxable remuneration and earlier years' pay may usually be increased to allow for inflation, if stated in the scheme rules.
You also mention that you are in good health but have three children who have now flown the nest.
If you go down the route of the guaranteed annuity, including a benefit for your wife, then out with the five-year guarantee period, there will be no benefits payable to them. This may lead you to considering the possibility of drawing an income directly from the fund so that, in the event of both you and your wife dying before age 75, there could be something to pass on to them. However, as the proceeds from the Scottish Widows plan have to be taken in one go, this would mean giving up the guaranteed annuity, which would seem a steep price to pay.
When considering your retirement, it is important not to look at a single asset in isolation. It could be that the combination of the tax-free cash sum and assets within your estate may be sufficient to provide a legacy for your children. You could also consider taking out a joint-life second-death life insurance plan to provide protection against death in the short to medium term, with the added advantage that it could be used to cover any inheritance tax liability the estate may have in the future.
As you will need to make a decision at the scheme normal retirement date, you are not likely to be affected by any changes in legislation proposed in the recent White Paper.