Retirement Muscle
Pension simplification gives greater flexibility

Changes to pension rules in April last year widened the options available to people looking to maximise their retirement income. The rules on the amount you can withdraw through an unsecured pension, another name for income drawdown, have been relaxed. It is now possible to take more of your money out of your pension before you buy an annuity.

An unsecured pension allows you to draw an income from your pension fund while leaving your fund invested. People with defined contribution pensions often opt for an unsecured pension because of the flexibility it offers in terms of income levels and death benefits. Since April 2006, you can vary your income from this type of plan between nil and around 120 per cent of the equivalent annuity you could buy with the same pension fund. These income limits are reviewed every five years.

Unlike a conventional annuity, all is not lost on death as your beneficiary can have the remaining pension fund, less a 35 per cent tax charge. Alternatively, they can continue with the income drawdown from the fund or use the fund to buy an annuity in their own right. This means that the unsecured pension route can be a particularly attractive option for people in poor health who are keen to provide for dependants.

Prior to the age of 75, the death benefits can be in the form of an income for your dependant or a lump sum for your beneficiaries. This could provide a useful route for passing funds to the next generation without incurring inheritance tax (IHT).

Unsecured pensions can also be particularly useful for those who are partially retired and who are receiving some form of income. The ability to draw income directly from the fund rather than purchasing an annuity can provide you with a great deal of flexibility in the amount of income you take and the timing of that income.

You need not necessarily choose between an unsecured pension versus an annuity. You could do a bit of both. You may consider using part of your pension fund to buy an annuity to deliver a core level of income, the level being set by the minimum income that you require. You could draw an income directly from the balance of the fund, thereby utilising some of the advantages of unsecured pensions.

Another change introduced by the pension simplification rules makes it possible to take up to 25 per cent tax-free cash from any form of defined contribution or money-purchase pension without having to take an income at the same time. This could be particularly useful for those who wish to access some capital before they really need their pension. You can take a quarter of your pension pot as a tax-free lump sum when you reach the age of 50. This will rise to 55 from 2010.

Before considering annuity alternatives, it is essential to get professional financial advice. The range of retirement options today makes it especially important to seek good advice on this subject. If you require any further information about the services that we provide or would like to review your financial planning position, please email or contact us.

Levels and bases of, and reliefs from, taxation are subject to change.