New Pension Schemes
Pension Simplification has radically simplified how pension income can be provided, from what was a bewildering range of different regimes surrounding occupational and, personal pensions, additional voluntary contributions and retirement annuity contracts (Section 226 contracts), into either Secured Income, Unsecured Income, (or for those aged 75+) Alternatively Secured Income, as the following aims to demonstrate:
Secured Income
Is the name given to low risk pension income achieved by a proivate pension or money purchase occupational scheme purchasing an Lifetime Annuity, or a defined benfit scheme providing a pension directly from withing the scheme, such is the norm with final slary schemes. It is called secured because the income is known for life.
Unsecured Pensions
Instead of buying a Lifetime annuity or having a scheme pension, since 6/4/2006, you can receive an income (within certain minimum and maximum limits set by Government - currently roughly equal to the income you would get from a lever single life annuity for a person of your age and sex, with no minumum (2007/8)) , directly from the fund which remains invested until you decide to buy an annuity or until you reach 75 currently (2007/8), when the remaining fund will need to purchase an annuity, or you then transfer the plan to an Alternative Unsecured Income.
Should you also require a tax-free lump sum, this is taken at the outset of choosing Unsecured Pensions , not when you finally purchase the annuity.
As your remaining fund will be depleted each year by the income taken, the providing company must, at least every 5 years, conduct a review to see if the remaining fund has performed sufficiently well to maintain the level of income required or even allow for an increase. You may of course, vary it yourself as often as you want. Whilst this can allow for you to vary the income within limits to suit your changing requirements, you will not get the security of long term income stability which conventional annuities offer.
Advantages
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It allows deferment of annuity purchase until rates improve or at least (until age 75 currently )
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Allows for greater flexibility of income levels (being able to alter income within minimum and maximum permitted to suit requirements)
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Funds remain invested until annuity is purchased.
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Allows you to take the maximum lump sum from the entire fund whilst only taking your required income at outset.
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Increases tax planning opportunities as the level and frequency of income can be changed to fit in with other income and tax situation.
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Allows for a wide range of death benefit options including:
- Allowing your spouse to continue taking Pension Fund Withdrawal for themselves, until you would have reached 75, or they do, whichever is the earliest.
- Taking a lump sum but this currently is subject to a 35% income tax charge. It should, however, avoid being included for Inheritance Tax calculations providing you survive for at least 2 years after taking withdrawals and you haven’t deliberately minimised the income taken during your life to maximise fund availability at death.
- The spouse can take a Lifetime annuity.
Disadvantages
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Such schemes are called unsecured because unlike annuities, there is no guarantee that the level of income can be maintained indefinitely.
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Because income is taken directly from the fund, and the remaining fund is still invested, if investment returns fall your future income may have to reduce as your fund reduces.
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You need to make ongoing investment decisions as to how your fund should be invested, or seek advice which may cost your additional expense.
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Whilst you can switch back to a secured income at anytime there is is no guarantee that the amount of fund value would buy you an equivalent Lifetime Annuity, nor that annuity rates may not have fallen during the time you have opted to provide for income by income withdrawal.
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The funds you remain invested in will continue to make ongoing annual charges.
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Each 5 years your funds will need to have a review and based on fund performance and changes to minimum and maximum incomes allowed, your income may need to be reduced just at a time when you need more income.
Alternative Secured Income
This is similar to Unsecured Income but is solely for those who wish to continue income drawdown beyond age 75.
The main difference is that the income limit for ASP is now 90% (2007/8) (instead of 120% for those aged below 75) of the amount from the relevant GAD table. It also always uses the relevant figure for a 75 year old, rather than individual ages Similarly unlike unsecured rules where the minimum is currently nil (2007/8) the minimum income under Alternative Secured Income is now 55% of the same figures. Maximum income is also reviewed every year and not every 5 years.
Advantages
Disadvantages
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Such schemes are called unsecured because unlike annuities, there is no guarantee that the level of income can be maintained indefinitely.
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Because income is taken directly from the fund, and the remaining fund is still invested, if investment returns fall your future income may have to reduce as your fund reduces.
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You need to make ongoing investment decisions as to how your fund should be invested, or seek advice which may cost your additional expense.
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Whilst you can switch back to a secured income at anytime there is is no guarantee that the amount of fund value would buy you an equivalent Lifetime Annuity, nor that annuity rates may not have fallen during the time you have opted to provide for income by income withdrawal.
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The funds you remain invested in will continue to make ongoing annual charges.
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Each year your funds will need to have a review and based on fund performance and changes to minimum and maximum incomes allowed, your income may need to be reduced just at a time when you need more income.
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