The following notes apply to ‘Money Purchase’ pensions and not to people who are in company “Final Salary” pension plans. The purpose of these notes is to try and explain some of the common options open to clients when they come to take their retirement benefits. The options are complex and Guidance should be sought from a specialist like ourselves qualified to advise in your specific circumstances.

1. Tax Free Cash

Complex rules apply and specialist advice recommended to take maximum advantage of individual circumstances
Usually personal pension funds (and company money purchase schemes) carry the option to commute 25% of the fund value as a tax free lump sum

2. Scheme pensions

Pensions provided by the pension scheme itself (ie, a big final salary scheme) or by an insurance company nominated by the scheme administrator
Like a traditional pension annuity

3. Lifetime Annuities
With a traditional annuity the annuitant (person receiving the pension) gives cash to an insurance company in exchange for a guaranteed income for the rest of their lives. Once the annuitant dies, the income ceases and the insurance company keeps the balance of the initial investment.

Rates keep dropping - due in part to the poor investment returns forced on the providers and the increase in longevity
Single Life - paid for the annuitant’s life alone
Joint Life - paid until the last annuitant dies so a couple (e.g. husband and wife, civil partners or unmarried couple) take out the pension which continues to be paid throughout their joint lives
Reversionary Annuity - the pension is payable in full for the lifetime of the annuitant and then on their death a reduced pension will be payable to their dependant. (Typically the annuity reduces by 1/3 or 1/2 on the annuitant’s death)
Guarantee Period - it is possible to establish a guarantee period on the annuity (typically 5 or 10 years)
Escalation – many options including level annuities, fixed at say 3% or 5% pa or income escalates in line with RPI or a percentage decided by the annuitant

4. Income Draw-down (IDD)

As an alternative to using your accumulated pension fund to purchase a conventional annuity, it is now possible to purchase an 'Unsecured Pension' (previously known as a 'draw down'). * Current interim measures introduced in the June 2010 emergency Budget allow anyone reaching age 75 on or after the date of the Budget to defer purchasing an annuity until their 77th birthday. However any tax-free cash sum from their pension fund will still need to be taken by the 75th birthday. An industry review and consultation is underway.

Income can continue until age 77 * at which time you can maintain your income in the form of an Alternatively Secured Pension (ASP). This in effect unsecured income but in a much more restricted form so income has to be checked against assets each year
Many investment choices within an IDD including a short term (say 5 year) annuity
The initial income available from a draw down scheme is broadly based on an annuity that could otherwise be purchased
We recommend independent advice to explore specific options for each individual

5. Impaired Life Annuities

It is now possible (and common) to obtain underwritten ‘Impaired Life Annuities’ for smokers or individuals in ill health.

Smokers can sometimes obtain up to 15% to 20% better annuity rates
We always look to underwriting any medical problems
Severe ill health is sometimes better dealt with via a draw down or high level reversionary annuity

6. Payment Frequency

An annuity is usually paid monthly in arrears
Other frequencies often possible such as quarterly, half-yearly or annually, in advance or in arrears

7. Summary

Clearly, everyone would like the maximum pension with minimum risk. Unfortunately, this utopia is unavailable. At the end of the day, the type of annuity received will be a compromise between security and immediate income requirements. A pension fund of £100,000 (August 2006) would have purchased an annual pension for a male and female both aged 65 as follows:

Level pension for the male life alone £7,000
Level pension for the male life, 5 years guaranteed £6,900
Level pension for the female life alone £6,400
Level pension for male, 66% for female £5,500
Level joint life pension, 100% to survivor £5,000
RPI pension for the male life alone £4,800
RPI pension for the female life alone £4,200
RPI pension for male, 66% for female £3,500
RPI joint life pension, 100% to survivor £3,200