Annuity Options

Tax free lump sum

(also referred to as Pension Commencement Lump Sum)

You are usually permitted to take up to 25% of your pension fund at the start of your retirement as a tax free lump sum. This is known as the Pension Commencement Lump Sum (PCLS).

However, under new rules following the March 2014 budget, if your pension pots across all your arrangements total £30,000 or less, you can take the whole of it as a lump sum, from age 60. This has increased from £18,000. Pots of up to £10,000 each can also be taken as a lump sum (up to three such pots). This is known as ‘trivial commutation’.

If you do choose to take your entire pension pot or pots as a lump sum, this will not increase your tax-free entitlement. Therefore your tax-free entitlement will remain at 25%.

Many people find this a useful option, and a great way to start their retirement. However, it is important to note that you don’t have to take the 25%, you can take less or none – it purely depends on your personal circumstances. The more you take as your PCLS, the less of your pension fund there will be to generate an income for you.

Key points to consider

  • The size of your overall pension pot, and whether reducing it by 25% or any lesser amount limits the options available for you to take out a particular annuity
  • The fact that taking a lump sum will of course reduce the amount of annuity income you receive from the remaining funds
  • Any outstanding debts or mortgage you might consider clearing with this money, and any other options you might have to clear them
  • What level of savings you currently have available as cash and what kind of interest rate you could secure by placing the money in a bank or building society account
  • Whether you are likely to need to make any large purchases in the near future – for instance a new car, or repairs to your home which will need a large amount of capital.

Guarantee period

With a conventional annuity your income payments continue until you die.

Once you die, they stop altogether. There are two potential risks arising from this:

  • You die fairly soon after purchasing your annuity and the majority of the money you saved into your pension is lost
  • Anyone reliant on your income will receive no further payments and this may leave them at a significant financial disadvantage (in which case you might want to consider a dependant’s annuity).

Guarantee period

Most annuity providers offer the option of taking out a guarantee period with your annuity that ensures it will be paid for the duration of the guarantee period, even if you die. You can decide on anyone to be your beneficiary – either directly with the annuity provider, or in your will.*

Length of time you can guarantee

The guarantee period is usually anything between 1 and 10 years – you are free to decide. However, the longer the guarantee period is for, the less you will receive as income from the outset and you will need to weigh up the benefit of the guarantee period with the downside of a reduced income.

You may feel the cost is worth the extra peace of mind – it is worth asking your financial adviser to provide a comparison of the costs with or without a guarantee period.

After the guarantee period ends

If you live past the guarantee period your income will continue, but once you die, your payments will cease.

*It was announced in the Chancellor’s Autumn Statement on 3rd December 2014, that on or after 6th April 2015 all Joint-life annuities can be paid out to any beneficiary and where an individual dies under age 75 with a joint life or guaranteed term annuity, any payments to beneficiaries will be tax free.

If you die later, the income will be taxed at the dependant’s marginal rate of tax. Changes are subject to final legislation.

Income for loved ones

Dependant’s or ‘joint’ annuity

One of the potential risks of purchasing a conventional annuity is that on your death, unless you have selected a guarantee period on your annuity, or a dependant’s, spouse’s or civil partner’s pension, your payments will stop. Anyone reliant on that income may then find themselves in some difficulty.

To overcome this, most annuity providers offer the option of selecting a spouse’s, civil partner’s or dependant’s annuity. This enables your income payments to switch to your spouse, civil partner or someone financially dependent on you, such as a long term partner, should you die before them.

Choose the amount of income

You can decide how much of your income they will receive – for instance 50% or 100% – and this will continue to be paid to them for the rest of their life.

Consider how it reduces your annuity income

Selecting a dependant’s annuity will reduce the amount of income you receive from the start, and selecting a higher percentage of your income as a dependant’s annuity will reduce it further.*

Joint annuity options chart

 

Weigh up your options

You will need to weigh up the peace of mind benefit this option provides, with the reduced income you receive from the point you take out your annuity, and whether you have existing provisions such as life assurance which should be considered.

*It was announced in the Chancellor’s Autumn Statement on 3rd December 2014, that on or after 6th April 2015 all Joint-life annuities can be paid out to any beneficiary and where an individual dies under age 75 with a joint life or guaranteed term annuity, any payments to beneficiaries will be tax free.

If you die later, the income will be taxed at the dependant’s marginal rate of tax. Changes are subject to final legislation.

Protecting against inflation

For anyone on a fixed income, the effects of  inflation over time should be a serious consideration.

Over a sustained period of time, consistently high inflation can substantially reduce the amount of goods and services you can buy if your income has not risen to keep pace.

To help protect against the effects of inflation, you can choose to increase your annuity income in line with inflation by opting to have your income linked to the Retail Prices Index, which measures the average change in the prices of certain goods and services purchased in the UK. This option is often referred to as escalation. However it is worth noting that if you select RPI without a floor level, your income will fall if RPI is negative.

By choosing escalation in line with the Retail Prices Index you will receive a lower level of income intially compared with a level annuity, but in sustained periods of high inflation it may help your income keep pace.

 

You can also choose to increase your annuity in line with a set percentage that you have chosen from a range we offer. This is called ‘fixed escalation’. This option does not guarantee to keep pace with inflation, but instead it guarantees to increase your pension each year by the percentage increase you have chosen.

Value protection – JustRetirement

Value protection

Value protection is an option you can choose when you take out your annuity that returns a lump sum to your beneficiaries if you die without having received the full value of your pension fund. It is sometimes known as annuity protection.

How does it work? When you take out your annuity, you can choose to protect a percentage of your pension fund, right up to 100%. The lump sum payable when you die is the percentage of your pension fund that is protected, less the total gross income already paid to you as an income.

Points to consider

  • The lump sum, if paid, will be taxed currently at the rate of 55%* before it is paid to your beneficiary
  • Some providers limit value protection so that it is only payable if you die within a certain time period, such as before your 75th birthday
  • The lump sum is not normally counted as part of your estate for inheritance tax purposes
  • The lump sum is paid either on your death or, if applicable, on the death of your surviving spouse, civil partner or dependant
  • If the total income paid out is more than the protected amount, no lump sum will be paid.

*It was announced in September 2014 that lump sum payments made after 6 April 2015 will be tax free, should you die before your 75th Birthday. If you die later, the lump sum will still be taxed but at reduced rate. Changes are subject to final legislation.

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