Retirement Planning Back
You may already be aware that the landscape of pensions has changed significantly in recent years which in turn has provided many more options around saving for retirement and options at retirement.
What is a Pension?
This is simply a savings plan to help build up funds for your retirement. Pensions have very favourable tax treatment, offering tax relief at your personal marginal tax rate. This means that if you are a basic rate tax payer, you will receive 20% tax relief on the gross contribution into your pension. Or to put it another way, if you pay in £100 per month into your pension, the actual amount being contributed will be £125 per month after the provider has claimed your tax relief from the government.
For higher rate tax payers, you can claim your additional tax relief through completion of an annual tax return, disclosing to HMRC your pension contributions. This will have the effect of increasing your basic rate tax band.
The way you can take a pension has also changed. Before April 2015, the conventional way to crystallise the pension fund for your retirement was to purchase an Annuity, which is a guaranteed income for life. Whilst Annuities still have a place in the market and should still be a consideration, you now have another option:-
The new government legislation introduced the ability to take your pension flexibly, meaning you can take as little or as much as you want, when you want. This can be done through a Flexi Access Drawdown Pension. Whilst Drawdown Pensions have been around for a while, they have only offered flexible access with restrictions such as maximum income levels according to actuary rates.
Are there any other differences between an Annuity and Flexi Access Drawdown?
Well, yes. One of the key differences is that an Annuity is no longer invested on the stock market and carries no risk. It provides an income for life in exchange for the pension pot. How much income will depend on the Annuity rate being provided at the time.
Flexi Access Drawdown however differs in the sense that it remains invested on the stock market, whilst you are taking income and withdrawals. Therefore, it is a risk based product and will be subject to market fluctuations. As you have not given up access to your pension pot in exchange for an income, you still have access to the whole pot. Therefore if the pension is not managed properly, there is a very real risk you could run out of money so it is important to take advice in this area.
Annuity or Flexi Access Drawdown - What is best for you?
There are a lot of factors that the answer to this question will depend on. To get you started, here are a few questions that you should ask yourself:-
- Will I need flexible access to my pension savings now or in the future?
- Will the income provided by an Annuity be sufficient?
- What is my attitude to risk?
- Am I happy for my pension to still be invested on the market subject to fluctuations whilst I am taking my income?
- How do I want my dependents to benefit from this pension?
A Flexi Access Drawdown is good for estate planning as it can be passed on entirely to whoever you decide, whereas an Annuity is restricted to providing a dependents benefit to either a spouse or child. It is important to also consider that, a Flexi Access Drawdown Pension can be converted to an Annuity anytime however, it cannot happen the other way around.
As you can see, there are lots of decisions to make. We always recommend you speak with your Financial Adviser to help with your retirement planning as they can help find the best pension to help build your savings and what route is best for you when you reach retirement.
To arrange a complimentary consultation, please contact our Independent Financial Advisers on 0800 038 9733.