The Origen Guide to Retirement Options. Annuity Drawdown Lump sum Retirement income Death benefits. Illuminating Advice

Transcription

1 The Origen Guide to Retirement Options Annuity Drawdown Lump sum Retirement income Death benefits Illuminating Advice

2 The Origen Guide to Retirement Options Following the introduction of Pension Freedom in 2015, you now have greater choice and flexibility about how you use your retirement fund. The decisions you make will impact your income in retirement. This guide explains your retirement options. If you would like to discuss your retirement options, please contact your adviser or our Client Liaison team on or Calls are charged at your phone company s basic rate. All calls are recorded for business purposes. The Origen Guide to Retirement Options

3 The Origen Guide to Retirement Options explains the different ways you can use your retirement fund to provide for your future income. You can use a combination of these solutions. Looking for guaranteed income Your retirement fund can be exchanged for a guaranteed lifetime income by buying an annuity. Looking for flexible income Your retirement fund can provide an income while remaining invested for potential growth using income drawdown. You can adjust the income level to suit your needs but the income is not guaranteed. Taking a cash lump sum You can take lump sums from your retirement fund. Lump sums over the 25% tax free cash amount may be taxable. Building a full picture of retirement income If you have workplace pensions based on salary and service (known as defined benefit schemes), you may not have access to the pension freedom options. You may be able to transfer but you should take care in this area and seek professional advice. You may also have other pension pots, savings and investments or State Pension which can provide retirement income. Death benefits for personal pensions Pension funds are generally free of Inheritance Tax. With the correct planning, your retirement fund could be passed on to your beneficiaries. What are your next steps? Our advisers can help you make the right choices to best meet your financial goals - whether you are preparing for retirement, at retirement or managing your retirement income. Page 08 Page 12 Page 16 Page 20 Page 24 Page 28

4

5 Freedom and Choice in Pensions In April 2015, the biggest reforms made to UK pensions in a generation were introduced. The changes mainly apply to defined contribution pensions (also known as money purchase), where you and/or your employer pay a contribution into a fund to provide benefits at retirement. Some examples of defined contribution pensions are personal pensions, stakeholder pensions and many employer group pension schemes and master trusts. From age 55, you have the freedom to draw as much or as little from your pension pot. If you were born after 5 April 1972 then the minimum age increases to 57. It is likely that this minimum age will increase further in the future. You can: Buy an annuity - to provide a regular guaranteed income Remain invested - using drawdown to provide an income Take a cash lump sum You can usually take 25% of your fund tax free with the remainder taxable. You can choose to take retirement benefits from your fund all at once or in stages. Most of the reforms do not apply to defined benefit pensions at this stage, although this may change in the future. See page 20 for more information.

6 Are you to reti Your choices Follow our flow chart to help you decide what options may be best for you. YES NO Do you have a defined benefit pension? Do you have a defined contribution pension? Do you have YE YES Yes Income may be fixed for your lifetime, please ask your consultant. Have you alre a guaranteed in with your pe NO Are you YE Do you want to take your pot as a cash lump sum, receive a medically enhanced pension or have flexibility in taking your benefits? Yes - Do you want a guaranteed lifetime income? Yes - You will need to seek financial advice. Final salary pensions offer valuable benefits that normally should be protected No you can draw a pension directly from the pension scheme Yes - I want my entire income guaranteed Annuity For more information see page 8 The Origen Guide to Retirement Options

7 a pension? S NO ady bought come for life nsion pot? Do you work? S 55 or over? NO I m employed Ask to join your company pension YES I m self-employed Consider paying into a personal pension NO I don t work You can make contributions up to 2,880 a year and get tax relief Do you have a retirement plan and are you on track to meet your targets? ready re? No - Do you need some cash immediately, for example to help clear debt, such as your mortgage? Yes - Great news. You can consider whether these new freedoms will help you meet your retirement goals You could cash in some of your pension pot No - Start planning now. Book a meeting with us and we can help create your personal retirement plan Yes - I would like some guaranteed income, but would also like some flexibility to cover my essentials No - I want to keep my pension invested for flexibility and growth. I understand this is more risky than buying an annuity and my savings may run out before I die My pension is small so I want to take it as a lump sum Drawdown For more information see page 12 Cash Lump Sum For more information see page 16

8 The Origen Guide to Retirement Options

9 Looking for guaranteed income An annuity pays a guaranteed lifetime income. You decide at the outset how the income will be paid, but once set it cannot be changed. You can choose to have an income that increases by a fixed amount or in line with inflation, set an agreed percentage to be paid to your spouse or civil partner when you die or include a guaranteed payment term. Each of these options will reduce the starting amount of income you receive. Next steps Death benefits Building a full picture of retirement income Cash lump sum Flexible income Guaranteed income 08

10 Buying an annuity Annuities remain the best solution for many retirees, providing a known income for their retirement which can include protection for their partner and dependants. Recent changes to annuities include: Lifetime annuities can decrease as well as increase once in payment. This will allow annuities to be more flexible, for example, reducing when you become eligible for the State Pension. Lump sums can be paid from lifetime annuities provided that they are specified when the contract is set up. Guaranteed annuities can continue beyond the previous ten year maximum, which allow payments to be made to beneficiaries. The maximum guarantee period normally available is 30 years. Guaranteed annuities can pay a lump sum to beneficiaries when the income remaining in the guarantee period is under 30,000. Beneficiaries can receive income payments as a lump sum if they wish, rather than having to spread payments over the remaining guarantee period. Allowable beneficiaries can include a spouse, civil partner or financial dependant or anyone nominated to be a beneficiary. This is best explained with an example: Mr. Smith, 60, decides to buy a lifetime annuity with his pension fund of 100,000. He takes 25,000 as a tax free lump sum, and a pension provider converts the remaining 75,000 into a level income of 3,182* each year. This income will be paid for the rest of his life and the amount of tax he pays will depend on his other income sources. *Source: Money Advice Service based on: joint annuity, guaranteed for 5 years, level income, monthly in advance payments The Origen Guide to Retirement Options

11 Impaired and enhanced annuities A number of factors are considered when assessing your eligibility for an increased annuity, including your health, lifestyle, smoking habits and in some cases the postcode area you live in. Insurers consider whether these factors have an impact on your life expectancy and this could mean receiving a significantly higher income. In some cases, an increase of over 30% is achievable. Many of our clients have already benefited from increased rates, but if an enhanced annuity isn t available to you, you can still get the best rate by exercising the Open Market Option when sourcing your annuity. Annuity rates vary across providers, so you should shop around to get the best rate. Our advisers can help you to find the best rate. This is best explained with an example: Using the same example as before, but assuming that both Mr Smith and his wife smoke 20 cigarettes a day and are also on medication for high blood pressure, he will receive an extra 66 per year due to their health conditions. Guaranteed income Mr. Smith, 60, decides to buy a lifetime annuity with his pension fund of 100,000. He takes 25,000 as a tax free lump sum, and a pension provider converts the remaining 75,000 into a level income of 3,360* each year. This income will be paid for the rest of his life and the amount of tax he pays will depend on his other income sources. *Source: Origen based on: joint annuity, guaranteed for 5 years, level income, monthly in advance payments. Next steps Death benefits Flexible income Cash lump sum Building a full picture of retirement income 10

12 The Origen Guide to Retirement Options

13 Looking for a flexible income Drawdown can offer more flexibility as you can alter your income to suit your needs. The remaining fund is invested, so it is exposed to investment risk, which means your fund value can fall, but also has the potential for growth. The income is not guaranteed and will only be paid while you have money left in your drawdown plan. Next steps Death benefits Guaranteed income Flexible income Cash lump sum Building a full picture of retirement income 12

14 Entering drawdown Flexi-Access Drawdown (FAD) allows you to take money flexibly from your pension pot. Your pension fund will remain invested, meaning that the value of your remaining fund will rise and fall depending on the market conditions and the performance of your chosen investments. In most cases, you can take up to 25% of your pension pot as a tax free lump sum with the remaining 75% being taxed at your marginal rate of Income Tax. Within drawdown you have the choice of taking just the tax free cash, just income or a mixture of the two. 150,000 This is best explained with an example: Mrs Brown has a pension pot worth 150,000. She enters drawdown and decides to just take her 37,500 tax free lump sum. She will pay no tax on this withdrawal and can choose how her remaining 112,500 fund is invested. The following year she would like to take out 10,000. She cannot take any more cash out tax free and she is already a basic rate taxpayer. To receive 10,000 she will need to draw 12,500, which will provide her with 10,000 once basic rate tax of 20% ( 2,500) has been paid. 112,500 Drawdown 12,500 37,500 On death, any remaining money within your drawdown plan can be passed on to a beneficiary or beneficiaries of your choice free of Inheritance Tax. The tax treatment of death benefits is covered later in this guide. (see page 24) 2,500 10,000 The Origen Guide to Retirement Options

15 Guaranteed income Many people underestimate their life expectancy and budget their retirement income needs on too short a term. You will continue to take investment risk in drawdown. If the funds you are invested in fall in value or if you make large withdrawals you risk running out of money. Furthermore, if your fund should suffer sharp market falls when you enter drawdown, it may be difficult to recover these losses without taking more investment risk. We strongly recommend that if you are considering drawdown, you should seek professional financial advice and have a yearly review for drawdown plans as a minimum. Drawdown is unlikely to be suitable if you have a smaller pension pot, especially if you do not have access to other forms of secure income. Flexible income Cash lump sum Existing drawdown arrangements Before the tax year 2014/15 there were two different types of drawdown; capped and flexible. In capped drawdown the income you can take each year is limited by the fund value and factors set by the Government Actuary s Department (GAD). These factors vary based on current gilt yields. Your drawdown fund is reviewed every three years by the pension provider who will re-calculate the maximum level of income you can draw from your plan. If you are aged over 75, your fund is reviewed every year. Capped drawdown plans will continue under these rules unless you ask for the fund to be converted into a Flexi-Access Drawdown (FAD) to access the new flexibility. If you take income over the capped drawdown limits, then your fund will also automatically be converted to Flexi-Access Drawdown. Flexible drawdown was available to savers who met a minimum income requirement before they were allowed full access to their pension pot. Flexible drawdown plans have been automatically converted into Flexi-Access Drawdown. Building a full picture of retirement income Next steps Death benefits 14

16 The Origen Guide to Retirement Options

17 Taking a cash lump sum You can gain access to your retirement fund by taking lump sums, known as Uncrystallised Funds Pension Lump Sums (UFPLS). Next steps Death benefits Guaranteed income Flexible income Cash lump sum Building a full picture of retirement income 16

18 Taking a cash lump sum 25% of each payment is tax free and the remainder will be taxed at your marginal rate of Income Tax. You can choose to use all or just part of your pension fund. This is best explained with an example: Mr Green has a pension pot worth 150,000 and he takes 15, % of his 15,000 withdrawal ( 3,750) would be tax free with the remaining 11,250 subject to his marginal rate of Income Tax, for example basic rate tax at 20%. This would leave him with 12,750. If Mr Green decided to take his entire pension pot as cash, he would face a much greater tax bill. While 37,500 would be tax free, 112,500 would be liable to Income Tax, leaving him with a tax bill of 35,860. He also loses personal allowance for earnings over 100,000, which dramatically increases his effective marginal rate of tax. 150,000 Withdrawal 15,000 Taking large lump sums in one tax year will normally create bigger tax bills than spreading withdrawals over several years. It s likely to be in most clients interest to take taxable income from their pension pot over several tax years. 9,000 at 20% 11,250 Receives 3,750 12,750 The Origen Guide to Retirement Options

19 Taking an UFPLS or income from drawdown will also trigger the Money Purchase Annual Allowance, which restricts the amount you can save into a defined contribution pension to 4,000 per year, a big reduction from the standard 40,000. You can use the Small Pots rule, which allows you to take up to three defined contribution pension pots worth less than 10,000 each without triggering the Money Purchase Annual Allowance. How will I pay tax? If you take income from a pension provider as UFPLS or from drawdown they will normally withhold some Income Tax from your money. If they do not have your correct tax code they may not deduct the correct amount of tax, which could result in you making an overpayment or an underpayment, which could lead to further tax charges in the future. If you are in doubt about the amount of tax you would need to pay, we suggest you seek appropriate professional advice. Do these changes apply to all pension plans? Pension schemes can ignore their scheme rules and follow the new pension tax rules instead, in order to pay out payments flexibly or to provide a drawdown facility. However, this does not mean that all schemes and providers will choose to offer these new rules and it will be down to each scheme or provider to determine their approach. Contact us or your provider directly to find out if the new pension rules apply to your pension plans. Next steps Death benefits Guaranteed income Flexible income Cash lump sum Building a full picture of retirement income 16 18

20 The Origen Guide to Retirement Options

21 Building a full picture of retirement income You may have a Defined Benefit (DB) pension scheme, where your pension benefits are based on your salary and service. The legislation changes may not apply to these pensions, so you may wish to consider what you do with these pension benefits. You may also have savings or investments which can provide retirement income and receive a State Pension. Next steps Death benefits Guaranteed income Flexible income Cash lump sum Building a full picture of retirement income 20

22 Building a full picture of retirement income A Class of 2018 report by Prudential highlighted that employees planning to retire expect to receive an average annual income of 19,900. Retirement income can come from personal pensions, workplace pensions, savings and investments, as well as the State Pension. Workplace pensions - defined benefit schemes Defined Benefit (DB) pension schemes provide retirement benefits based on your salary and service with the employer, whereas Defined Contribution (DC) plans are based on the fund value from the pension contributions made by you and your employer and the investment performance. At retirement a DB pension will pay a guaranteed income for the remainder of your life. The scheme will also usually provide a survivor s pension in the event of your death, provided you have a dependant that meets the scheme criteria (normally a spouse or civil partner). DB pension benefits will often include automatic increases at a defined rate, meaning that your pension income has some protection against inflation. Should I consider transferring? A DB pension cannot offer you access to the flexible retirement income options available following the introduction of the Freedom and Choice legislation in 2015 and a transfer may provide more favourable options around death benefits. If you transfer to a DC scheme you can currently access your pension benefits from age 55. But if you do choose to transfer to a DC scheme, you have to be willing to accept that the value of your pension can go down as well as up and the exchange rate you convert your pension fund into a guaranteed income for life, known as an annuity, may change in the future. Please take a look at our guide Putting your pension plans to work to help you review your defined benefit pension plans. Please ask your Adviser for your copy of this guide or visit website The Origen Guide to Retirement Options

23 Guaranteed Next income steps Smaller pension funds Triviality rules allow pension funds up to the total value of 30,000 to be taken as a lump sum from age 55, subject to Income Tax. This also applies to defined benefit pension funds that are deferred or in payment. All pension benefits must be taken within a 12 month period under these rules. The Small Pots rule allowing funds up to the value of 10,000 to be drawn as a lump sum also applies to defined benefit schemes. Investments and savings income You may also receive additional income in retirement from investments, savings or other assets e.g. share dividends or buy-to-let property. This is usually subject to Income Tax, however ISA withdrawals are not subject to Income Tax, so check that you are making full use of your allowances. State Pension The single tier pension was introduced in April 2016 and in tax year 2018/19 it is per week ( 8, a year). To qualify for State Pension you need to have a minimum of 10 years qualifying National Insurance payments and 35 years to receive the maxiumn amount. You can get a State Pension forecast online at or by completing a BR19 application form. The State Pension age is being raised to 66 in October 2020, with further increases to 67 between 2026 and You can make additional National Insurance contributions to increase your entitlement to the State Pension or you can defer the State Pension if you don t need the income at State Pension age. Our advisers can review your exisiting plans and then help to make recommendations on addressing any shortfall and providing retirement income most effectively. Next steps Death benefits Building a full picture of retirement income Cash lump sum Flexible income 22

24 The Origen Guide to Retirement Options

25 Death benefits for personal pensions Pension rules now offer greater flexibility to pass on pension wealth to the future generations, making pensions a key part of estate planning. Next steps Death benefits Guaranteed income Flexible income Cash lump sum Building a full picture of retirement income 24

26 Death benefits for personal pensions What death benefits are payable if you die before age 75? For defined contribution pensions, all death benefits are tax free if you die before age 75, (as long as the scheme is notified within two years of the death), including any dependants pension payable from an annuity. Funds in drawdown can be transferred to a beneficiary and they can draw a tax free income over their lifetime or take a lump sum. Death before age 75 For defined contribution pensions Lump Sum All tax free Drawdown Tax free, if taken via drawdown or annuity. You can nominate any beneficiary Annuity Tax free. You can nominate any beneficiary The Origen Guide to Retirement Options

27 Guaranteed income What death benefits are payable if you die after age 75? For defined contribution pensions, lump sum death benefits will be taxed as income of the receiving beneficiary. Alternatively, your pension fund can be transferred to any beneficiary or beneficiaries and they can draw income from the fund subject to their marginal rate of Income Tax. Pension funds can be passed on multiple times, with the tax treatment dependent on the age of the person holding the pension fund when they die. Flexible income Cash lump sum Death from age 75 Lump Sum Drawdown Annuity For defined contribution pensions Marginal rate of Income Tax on the recipient. Taxed as income at marginal rate of beneficiary. Nominate any beneficiary. Income taxed at recipient marginal rate of Income Tax. You can nominate any beneficiary. Annuity protection lump sums taxed at marginal rate of Income Tax on the recipient. Building a full picture of retirement income Under the current rules, these changes in tax will only apply to money purchase pensions and annuities. Generally death benefits from scheme pensions or defined benefit pensions are more restrictive and have less flexibility to pass on benefits to beneficiaries. Next steps Death benefits 26

28 The Origen Guide to Retirement Options

29 What are your next steps? At Origen we understand that every individual is unique. You can be confident that any pension advice will be tailored to you and your financial goals. To discuss your pension requirements, please contact your adviser or our Client Liaison team on: or us at: Calls are charged at your phone company s basic rate. All calls are recorded for business purposes. Next steps Death benefits Building a full picture of retirement income Cash lump sum Flexible income Guaranteed income 28

30 What are your next steps? Guidance or advice? The Government has launched Pension Wise, a service to help provide information and guidance to people with defined contribution pensions at or approaching retirement. The website is Everyone who has a defined contribution pension plan can receive free and impartial guidance when they come to retirement. To ensure that this service is completely impartial it will be offered by The Pension Advisory Service (TPAS) for those who wish to deal over the telephone and by the Citizens Advice Bureau for face-to-face service. They will provide information on the different types of policy you have and the retirement income options available to you, but you will have to either make your own decisions or seek advice from a FCA regulated adviser following your guidance session. The guidance service cannot make a recommendation of the action you should take. Be alert and avoid pension scams The greater flexibility from Pension Freedom gives greater access to retirement funds and more choices on how to provide income in retirement, but it has also attracted criminals exploiting these changes. If something sounds too good to be true, it probably is. Common warning signs are offering unusually high investment returns, cold calling, offers of free financial advice and access to your pension funds before age 55. Be wary of cold calls, unsolicited texts or s if you have not heard of the company, check that the firm and any adviser are registered with the Financial Conduct Authority at All firms on the register are regulated by the Financial Conduct Authority, which means that they have to act fairly and reasonably with clients by adhering to regulations in how they operate. This gives you, a level of protection. You can make yourself aware of some common scams at - which maintains a list of known scams. You have worked hard to build up your investments so proceed with caution and please ask your Origen Adviser for their advice and support to avoid you becoming a victim. The Origen Guide to Retirement Options

31 What should you do now You now have greater freedom on how you access your pension fund, but with that comes responsibility. To help you use your pension fund wisely and to provide required income during retirement, take a look at these key considerations: There is a real risk that without careful planning and advice, you will use up your pension pot early and need to fall back on the State or sell other assets. Annuities are appropriate for most people where income security is a priority Tax planning is key - and as the rules around tax and pensions regularly change, you need to give your plans a regular review Guaranteed income Flexible income Cash lump sum Opportunities to pass income onto your dependants The State Pension age continues to rise and a new flat rate State Pension began in April 2016 Some providers, especially smaller schemes, will be unwilling or unable to provide all the pension freedom options available Reaching age 55 is the first milestone in your retirement planning and retired life; it is important to plan carefully and appropriately If you would like to discuss your retirement options, please contact your Origen Adviser or alternatively contact our Client Liaison team on: or us at: clientliaison@origenfs.co.uk Calls are charged at your phone company s basic rate. All calls are recorded for business purposes. Lines are open 8.30am to 5.30pm, Monday to Friday. Building a full picture of retirement income Next steps Death benefits 30

32 If you would like to discuss your retirement options, please contact your Origen Adviser or our Client Liaison team on: Calls are charged at your phone company s basic rate. All calls are recorded for business purposes. Lines are open 8.30am to 5.30pm, Monday to Friday. Write to us at: Origen Financial Services, Infor House, 1 Lakeside Road, Farnborough, Hampshire, GU14 6XP us at: ClientLiaison@origenfs.co.uk Visit us at: A This guide is intended to be for information only and not to be taken as financial advice. Before taking any action based upon any of the content, you should seek advice regarding suitability and tax consequences. Origen Private Client Solutions is a trading name used by Origen Financial Services Limited who are authorised and regulated by the Financial Conduct Authority. Our Registration Number is Our Registered Office is: Infor House, 1 Lakeside Road, Farnborough, Hampshire, GU14 6XP. CA2830 Exp 08/2019