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Unconventional retirement

What variations on a conventional annuity can a pension client choose between?

I have my pension money in a section 32 buyout plan and my tax-free cash is less than 25 per cent of the fund. I want to consider taking retirement benefits and would like to hear about the new options available.
You are able to take a tax-free lump sum from your plan and draw the remainder as income. However, you have a choice as to how income is taken. The conventional route would be for you to take income in the form of an annuity payable throughout your lifetime.

The benefit of an annuity is you will receive a guaranteed income for life. Your pension can also be guaranteed to continue in the event of your death for up to a maximum of 10 years. You may incorp-orate a spouse’s or depend-ant’s pension of up to 100 per cent of your own pension to be payable on death.

A level annuity will provide the highest level of initial income but payments will not increase in the future and the real value of the pension will be eroded by inflation. An alternative to a conventional annuity is an investment-linked annuity. This can be with-profits or unit-linked and, unlike a conventional annuity, the level of income is not fixed but depends on the performance of the underlying fund. If a target growth rate is achieved, the annuity usually remains level. Payments increase if the target growth rate is exceeded and fall if the growth rate is not achieved.

Value-protected annuities, also known as capital-protected annuities, offer a return of fund if the annuitant dies before their 75th birthday. The lump sum payable will be the original purchase price less the annuity instalments already paid and will be subject to a 35 per cent tax charge.

Flexible annuities allow for payments to increase in certain circumstances. For example, it should be possible for an annuity to remain level until such time as an individual becomes seriously ill and requires long-term care.

It is also now possible to transfer pensions in payment. Short-term annuities, lifetime annuities, scheme pensions and dependant’s scheme pensions can be transferred from one insurance company to another, provided they are used to provide another pension of the same type.

An unsecured pension is pension income paid through income drawdown and/or short-term annuities prior to age 75. The maximum level of annual income is 120 per cent of the single-life level annuity payable without guarantee based on the Government Actuary’s Department tables.

Income levels can be varied between the minimum and maximum limits and must be reviewed every five years. An unsecured income can continue up to an individual’s 75th birthday and benefits must then be secured through a scheme pension, lifetime annuity or alternatively secured pension.

In the case of death during drawdown, a number of options are available. A surviving spouse can continue to receive an unsecured income until their 75th birthday, buy an annuity or take a lump-sum return of the fund less 35 per cent tax. If taking the lump-sum option, where the recipient is not a spouse or civil partner, the sum may be included in your estate for inheritance tax purposes. This could also apply if ill-health leads to your death within two years of the drawdown plan commencing.

An alternatively secured pension is a continuation of unsecured pension beyond age 75 but is subject to different rules. The option of short-term annuity purchase is not available. The maximum level of annual income is 70 per cent of the single- life level annuity payable without guarantee based on the GAD tables. Income levels can be varied between the new minimum and maximum limits and must be reviewed every year.

At each annual review after age 75, the member’s age is always assumed to be 75, regardless of their actual age. The purpose of this is to restrict the maximum income available and prevent older clients from overdrawing on their fund.

On death, the remaining fund must be used to secure an income where there are any surviving dependants. This can be in the form of an annuity or scheme pension, a continuation of the alternatively secured pension (if they are over 75) or through an unsecured pension (if they are under 75). The remaining fund can be paid to a charity.

If there are no dependants and the member makes no nomination for a lump-sum payment, the balance of the fund may be paid so that it becomes held by one or more scheme members.

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