Your retirement options explained
No one should be deterred from planning for their retirement by the jargon used in the pension industry. Happily, we are well versed in turning complex financial terms into plain English. Here we unravel some of the terms that you may have come across and be unclear about.
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Provides a regular and secure income for life. Tax free cash provided at outset and fund used to purchase an annuity paid for life. Your annuity income is paid at least annually and can increase, decrease or remain level in payment. Additional options can be selected at outset such as annual increases, spouse’s benefits or guarantees which reduce your own income. Once you have bought your annuity, you usually cannot change your mind or change benefits. On death there may also be the option of a capital payment less tax.
Provides a regular and secure income for life. Tax free cash paid at outset and fund used to provide income for life. Your scheme pension is paid at least annually and can increase or remain level in payment. Additional options may be offered at outset such as annual increases, spouse’s benefits or guarantees which reduce your own income. Pension income is paid directly by scheme. Once in payment you cannot change your mind or change the benefits.
Part of your fund and part of your tax free cash are used in segments to provide annuity income. The balance of the fund not used for income / tax free cash remains invested with a view to providing higher future benefits. Your starting annuity is smaller, but is supplemented by a portion of your tax-free cash sum. Each year you decide how much of your fund to use for annuity purchase and how much tax free cash is used to supplement your income. Because you don’t commit all your funds to buy an annuity immediately, you keep your options open.
Tax free cash lump sum paid at outset and fund remains invested. Income can also be selected if required. The balance of the fund not used for income remains invested with a view to providing higher future benefits. You can choose the income you want, and when you want it, between nil and 150% of an equivalent single life annuity. If investments do well, you may benefit from higher future income payments, and vice versa. On death, the remaining fund is available to pay benefits to your beneficiaries.
Tax free cash lump sum paid at outset and residual fund (subject to income tax) can be accessed immediately. Immediate access to the entire fund to provide income with no limits. 25% Tax Free Cash the rest subject to income tax. You can choose the income you want, and when you want it. On death, if there is any fund remaining then it is available to pay benefits to your beneficiaries. Policyholder must advise all other ‘active’ pension plan providers that they have flexibly accessed their benefits within 91 days, or face possible HMRC fines.
A lump sum is paid up to the full value of the plan. No regular income. Immediate access to as much of the fund as required. Of the amount paid out, 25% is paid free of tax with the rest subject to income tax. There is no regular income but you can choose when and how much of a lump sum you require. As long some funds are left in the plan, if investments do well you may benefit from higher future lump sum payments. Policyholder must advise all other ‘active’ pension plan providers that they have flexibly accessed their benefits within 91 days, or face possible HMRC fines.
You need to be aware that where an individual transfers funds from one registered pension scheme to another, and dies within two years of the transfer then their executors need to report this on the IHT409 form needed to get probate. HMRC will then investigate and if they consider that the individual knew they had a short life expectancy, they may decide that the amount transferred is assessable to IHT.