Retirement Options
Your retirement should be something to look forward to. It is one of the most important lifestyle changes anyone experiences. Ensuring your retirement is a positive time requires careful planning.
A pension is a tax-efficient way of providing an income and potentially a lump sum for your retirement.
People in their 20s are now expected to live well into their 80s or 90s – so it’s worth bearing in mind that if you retire at 65, you will probably have 20 years or more of needing an income.
If you are facing retirement soon, it's worth seeking advice to ensure you are managing your finances as efficiently as possible. For instance, it may be beneficial to consolidate the collection of pensions you have accumulated over your career to get a better annuity rate.
If you're planning for your retirement, you may wish to consider the following pension plan options:
Final salary scheme
The retirement income, and timing of taking benefits, will be determined by the scheme rules, and will be based on the scheme earnings and the period of time in the scheme.
Money purchase scheme
As a member of a money purchase scheme you will have a number of different options on how to use your accumulated pension fund(s). You can usually decide to take a retirement income between the ages of 55 (50 until 2010) and 75, and can use the open market option to shop around for the best deal available.
Tax free cash
25% of the fund(s) can normally be taken as a tax free cash lump sum.
Annuity (secured pension)
An annuity is a plan which provides, in exchange for a lump sum, an income for life. If you decide to buy an annuity you must decide on which basis. The options include: -
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Level |
Payments are fixed at the outset, and continue at this level until death |
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Single life or joint life |
Provision may be included for a spouse's pension |
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Escalating |
Payments increase each year at a fixed rate, or a rate which changes in line with changes in the Retail Prices Index |
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Unitised |
Payments are linked to the performance of an investment fund or funds, so may go up or down |
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Enhanced |
People with medical conditions which might reduce their life expectancy, such as diabetes or high blood pressure, may receive a higher income |
Income Drawdown (unsecured pension)
Your pension funds remain invested with income drawdown, but you take an income from the fund. This provides flexibility as you can vary your income to meet your requirements. However, as your funds are still invested, you are still exposed to the risk of your investments going down in value.
State pension
The basic state pension is payable from State Pensionable age and is currently £95.25 a week for a single person and £152.30 for a couple (2009-10 income tax year). If you do not have enough contributions your state pension will be less. In addition you may be entitled to a State Second Pension.
The above is a brief outline on the options available to you on retirement. It is important that you understand the advantages and disadvantages of the options available to you, and we recommend you seek professional advice.