Planning your retirement income

Maximising an income from your pension fund

The earliest you are currently permitted to take your retirement benefits is from the age of 50, but this is set to rise to age 55 from April 2010. If you are considering setting up a conventional lifetime annuity, which pays a secure income for life, there is now no requirement to buy an annuity by the age of 75. However, you must start to take your benefits from the age of 75, in addition to any tax-free element.

The options

Conventional-Lifetime Annuity
A conventional-lifetime annuity converts your pension fund into an income for the rest of your life, however long you live. You can add different options and purchase different types depending on your needs and circumstances. For example, your annuity can pay out to your spouse or partner on your death, or you can choose an enhanced or impaired life annuity, which may give a higher income than a conventional annuity if you have an illness or medical condition, or are a smoker. A conventional lifetime annuity is the simplest retirement option and provides a secure, taxable income which is payable for the rest of your lifetime.

Investment-Linked Annuity
Investment-linked annuities offer the chance to obtain a higher level of income, but you need to be comfortable with linking your income in retirement to the stock market. They may be suitable if you have other income sources, are prepared to take a risk to achieve a higher income or can accept the risk that your income may reduce. Investment-linked annuities are designed to give you the opportunity to obtain an income that increases during your retirement. If the risk of an unpredictable and possibly falling retirement income worries you, then conventional annuities may be more appropriate.

Unsecured Pension (formerly Income Drawndown)
Under the option of Personal Pension Fund Withdrawal, you can choose to take a tax-free cash lump sum immediately and then, instead of buying an annuity, leave the remainder of the fund in a tax-efficient environment. An annual income (taxed as earned income) can be taken, within prescribed limits, from the invested pension fund. This is a flexible option which may be a consideration for more substantial funds or if you have other sources of income. This allows you to take a taxable income directly from your fund, leaving the remainder invested. It is available up to age 75.

Phased Retirement
Phased retirement is a personal pension plan and allows you to buy an annuity or income drawdown in stages rather than all at once. It is up to you to decide how much income you need and when you would like to start taking it. You then cash in as much of the plan as necessary to provide your chosen level of income. You can take out a phased retirement plan any time after the age of 50 (55 from April 2010).

Alternatively Secured Pension from age 75
The government’s A-Day pensions simplification legislation, which came into force in April 2006, created Alternatively Secured Pensions (ASPs). ASPs are available to people reaching age 75 who do not want to buy an annuity with their pension fund. ASPs are intended to provide an income in retirement for scheme members and their dependants, rather than be used as a device to pass on tax-privileged pension funds.

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. Tax benefits may vary as a result of statutory change and their value will depend on individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent finance acts.