Probably the most important financial decision you’ll ever make
Each person has their own way at looking at life and their own set of unique circumstances; therefore we believe that it is essential you obtain professional advice when it comes to generating an income for your retirement. If your pension fund is due to mature in the next twelve months, make sure you talk to us sooner rather than later to help ensure that you don’t miss out on the best pension arrangement available for your requirements. Here we explain why converting pension savings into an income is probably the most important financial decision you will ever make – and there is no second chance if you get it wrong.
If you have an occupational pension the company will usually provide you with a retirement income automatically. If you have private plans or certain types of workplace schemes, these funds will be used either to provide an income or give a percentage of the fund tax-free, using the remainder to generate an income.
It’s important to start thinking about your retirement well in advance. You should contact us at least twelve months prior to your intended retirement date. This will enable you to consider what your income requirements will be and also give us the time needed to research the best option available for you.
Time is also required to gather information, collect up-to-date fund valuations and, if applicable, see how any private pensions will complement the State and your workplace pensions.
You may find that you end up using your personal pension fund to buy an annuity from an insurer, swapping your accumulated pension fund for a guaranteed lifetime income.
It is also important to note that your pension provider is not always the one offering the best annuity rates. We can help you consider taking advantage of the Open Market Option (OMO), which involves searching the market place for the best possible annuity.
You must take into account any Guaranteed Annuity Rate (GAR) that may be offered by the existing scheme, as this ‘guarantee’ is usually valuable and will be lost on transfer. If you are taking your benefits before or after the selected retirement date, you may find the transfer value is subject to a penalty charge.
A GAR is a fixed rate, written into your pension contract, at which you can convert your fund into an annuity irrespective of what OMO rates are doing at that time. There are normally some conditions written into the application of the GAR. It is usually only available at the scheme’s Selected Retirement Age, i.e. it will not apply if you retire early or late. It will normally only provide an annuity on your own life and often will not provide for post-retirement increases.
If you are a member of a defined benefit scheme, where you know what retirement income you will receive based on income and length of service, you must begin to draw your pension on or before age 75. If you are a member of a money purchase occupational scheme, a personal pension plan or a stakeholder scheme, where premiums build up a lump sum, a lifetime annuity must be secured on or before age 75.
Unsecured Pensions are a popular alternative to buying a lifetime annuity. They allow you to draw an income from your pension fund while the fund remains invested.
Anyone in a personal or stakeholder pension scheme can use a USP. However, some pension schemes will not operate USPs for small funds. If you are in an occupational money purchase scheme, you may be able to use a USP if the scheme rules allow it. If you are in an employer’s scheme that doesn’t offer a USP and you want to use it, you must first transfer your pension rights from that scheme into a personal pension scheme.
Another alternative to an annuity at 75 is to put your funds into an Alternatively Secured Pension (ASP). This is an arrangement that can be used at age 75 to avoid buying an annuity if you believe this does not suit your needs or if you believe that better annuity terms may be available at a later date or you want to keep your pension fund invested under your control.
With an ASP, all your pension monies not invested in annuities or scheme pensions already in payment make up your ASP fund at age 75. Any capital growth or income arising from those assets are treated as part of the ASP fund. An income can then be drawn from the ASP fund and the member is free to vary the amount paid year-by-year within the specified limits. The minimum amount of income is 55 per cent and the maximum is 90 per cent of the amount that could have been bought at age 75. This rate is laid down in tables produced by the Government Actuaries Department (GAD). The maximum amount must be recalculated each year at the beginning of the pension year.
The first pension year runs from your 75th birthday. The recalculation is made by reference to the then current GAD tables for someone aged 75. Each year as you get older the maximum continues to be assessed as if you were still 75. You can stop your ASP at any time and apply your fund to buy an annuity.
The value of investments and the income from them can go down as well as up and you may not get back your original investment. Past performance is not an indication of future performance.
