The phrase Pension Liberation has a very empowering feel to it and its one that a large number of unscrupulous companies are playing on, with promises to access your pension early and get back more than you would normally be permitted.
As HMRC take action to close more than 400 of these schemes, when can you actually take your pension benefits and what are the (legitimate) methods that can be used to enhance them?
Seek professional advice
This is the one time in most people’s life (even DIY investors) where they should seek the services of a qualified IFA to guide them through the vast array of possible solutions. Over the next few months we will try to provide you with a basic knowledge of these as a starting point for your discussions with an adviser.
Benefits available from age 55
Well first off, unless you are terminally ill with a life expectancy of less than 12 months the earliest that most people can access their pension is 55. Until April 2010 this was age 50 but with the increasing concern over the longevity of pension funds the government felt it prudent to introduce the change. Don’t be too surprised if this increases further in the future.
Tax free lump sum
Assuming that you take the maximum tax free lump sum (normally 25% of the fund) what could you expect to receive as an income? The answer to that question will depend on a variety of factors and not all will be suitable. This could be for reasons of health or taxation and whilst some allow higher maximum levels of income, they often require much greater levels of investment risk.
Many ways to create income in retirement
The table below shows what a 65 year old with £150,000 of pension fund might purchase and you can immediately see the wide variance in annual income available.
|Type||Annual Income Available|
|5 year fixed term annuity||£8,400|
|Underwritten annuity (smoker)||£10,296|
|With Profit annuity||£10,510|
|Open annuity (smoker)||£12,355|
Provides the lowest guaranteed income but does so without any investment risk.
Fixed term annuity
Provides a fixed income for a set period with a guaranteed fund value at the end that can be used to purchase a further annuity. Useful if you think annuity rates may increase in the future.
If you have any health or lifestyle issues then this option may significantly improve your annuity. The enhancement here is purely based on the annuitant smoking more than 10 cigarettes a day.
Allows complete flexibility over how much income you take between 0-120% of that available from an annuity. As your fund remains invested it requires a much higher level of investment risk to avoid erosion of your capital, especially if you draw the maximum amount.
Available since 2011 this allows you to take your entire pension fund as a lump sum (subject to tax) providing you have other guaranteed pensions totalling more than £20,000 per annum.
An annuity based on an expected investment return. If the annual declared bonus is higher or lower than the level you opted for your annuity changes accordingly. Higher levels of income are available but there is a chance that it may reduce in the future.
Allows drawdown levels of income (0-120%) but based on underwritten annuity rates. It does carry the same level of investment risk as capped drawdown.
There is not enough room in this article to start going into the different options that exist for each of these solutions but you can already start to appreciate what a complex subject this is and one that is likely to need some professional guidance.