Flexing drawdown for better client outcomes
This article has been written by the technical department at Standard Life
Flexibility to vary income to adapt to changing needs is perhaps the key appeal of income drawdown. So the drawdown changes announced in March's Budget create a catalyst for advice to help drawdown clients achieve better outcomes in retirement.
Advice is the key to good client outcomes
Standard Life's research shows that, particularly for wealthier clients, income needs are unlikely to match the conventional pension income shapes produced by annuities or defined benefit schemes.
SMILE!
•For many, we've identified a 'retirement income smile' pattern. This is driven by higher demand for income early in retirement when clients are still active. Income needs drop off with age, then pick up again as personal assistance and long term care needs develop.
•Others simply want a relatively modest, sustainable income – but with scope to turn it up if their circumstances change.
•Some wealthy clients' main need is to draw as much income as early as possible to gift to loved ones, via trusts or pension plans as well as directly, as part of a wealth transfer strategy.
Income drawdown is well suited to meet all these diverse client needs and aims. And the higher the income limit available, the more room there is to manoeuvre. Which is why the Budget announcement was so welcome.
But it's not about always taking the maximum allowed, it's about having the flexibility to take more income when it's needed and cut it back again when it isn't.
This is where advice is key. Drawdown isn't a 'self-service' option. It's complicated. There has never been a better time for advisers to demonstrate their true worth by helping drawdown clients do the right thing to exploit this flexibility to attain their financial goals.
Where did it all go wrong?
Drawdown users, and their advisers, have had a rough ride in the last few years. Markets have been difficult. But much of the pain has been imposed by the drawdown regime itself:
•The linking of drawdown rates to gilt yields means that plunging yields fuelled by QE have had a disproportionate impact on income limits.
•And the 20% limit cut, and new GAD tables, in 2011 simply compounded the problems.
A typical example illustrates this:
•A 60 year old man starting drawdown with a £100,000 pot in August 2007 (when gilt yields were 5.25%) would have had an income limit of £8,280 a year.
•At his 5-yearly review in August 2012, even if he'd maintained his £100,000 pot, this client's new income limit would only have been £5,300 (56% lower than the old limit)! This is partly owing to the 20% headline limit cut – but primarily because, by then, the gilt yield had dropped to 2%.
It's a case of the tail wagging the dog. Logically, with the same pot having to last him 5 years less, this gent's allowable income should have gone up!
Light at the end of the tunnel – an advice opportunity
Thankfully core elements are coalescing to create light at the end of the tunnel.
•Most importantly, gilt yields appear to have at last bottomed out (IG: but remember, this may not be the case and they could fall further).
•Markets remain volatile, but they're well up on the lows of 2009 that saw the FTSE 100 drop to almost 3,500. And the increasing availability of sophisticated, risk-based investment solutions makes it easier to reduce the volatility that can be so damaging in a decumulation environment.
•These factors, combined with the move back to 120%, should get income limits back to more realistic levels from the start of drawdown users' next income year after 25 March 2013.
Here is an example:
Edith started pension drawdown on 1 August 2012. She was 60, her drawdown pot was worth £150k and the GAD drawdown yield was 2.0% - giving an income limit of £6,450.
If no action is taken, this will simply increase by 20% to £7,740 from 1 August 2013.
But what if Edith triggers an earlier review by paying more money into her drawdown pot on 30 March? Changes since August could really boost her income limit:
•Unisex rates: Edith now benefits from 'unisex' (male) drawdown rates, following the implementation of the EU Gender Directive into UK law in December 2012.
•Rising yields: The GAD drawdown yield has gone up from 2.0% to 2.75% since August 2012.
•Rising markets: The FTSE has grown by about 25% over the same period. Suppose Edith's drawdown fund has done the same. So, even after taking her maximum £6,450 income, it's now worth about £180k.
•Getting older: And Edith has had a birthday, so is now 61.
Edith's new 100% income limit is £9,360 – allowing her to take an extra £2,910 from her drawdown pot before her new income year starts on 1 August.
This will increase by 20% to £11,232 on 1 August - over 45% more than if no action was taken (and over 74% higher than her August 2012 limit).
And the Government's kick-start of an early review to get GAD drawdown rates themselves back to reality mean there's more good news in the pipeline.
For example, improving market conditions mean advisers can potentially help boost clients' income limits sooner than the start of their next income year. This can also turbocharge the effect of the 20% hike when it comes. An early income review can be triggered simply by phasing more funds into an existing drawdown pot. Or by requesting an ad hoc limits review from the start of the new drawdown year.
This sort of flexibility supports holistic advice strategies that help put the client's needs first. Which is what drawdown is all about. But good professional advice is the key that can unlock it – creating the fundamental building blocks for the successful use of income drawdown as part of an efficient, flexible, but sustainable wealth decumulation strategy.
If you are a client of Green Financial - or not - and would like an income drawdown review, please contact me
Showing posts with label Income Drawdown. Show all posts
Showing posts with label Income Drawdown. Show all posts
Wednesday, 26 June 2013
Thursday, 12 January 2012
How have the pension income drawdown rules changed from 6 April 2011
How have the pension income drawdown rules changed from 6 April 2011
Some important changes were made to the pension benefit rules from 6 April 2011.
In particular:
•Pensions and lump sums no longer have to be taken by age 75;
•New income drawdown rules have replaced the existing unsecured pension (USP) and alternatively secured pension (ASP) rules, which have been abolished;
•A new type of income drawdown, known as flexible drawdown, is available for those who meet the new minimum income requirement (MIR);
•Existing USP and ASP cases will be gradually moved fully onto the new basis under transitional rules;
•The death benefit rules, and aspects of their tax treatment, have changed.
Do pensions and lump sums have to be taken by age 75?
After 5 April 2011, benefits don't have to be taken from a registered pension scheme by age 75 - they can just be left in the scheme as unused funds until the member needs them. Where scheme rules allow, this gives members the flexibility to delay taking their pension or tax-free lump sum until after age 75 - potentially even continuing a phased retirement strategy into their 80s or beyond.
However, the benefits still have to be tested against the lifetime allowance by age 75 (as a benefit crystallisation event). So even though the member may not be taking anything from their fund, if those unused funds are greater than the remaining lifetime allowance, a lifetime allowance tax charge will have to be paid. Any lifetime allowance charge incurred at age 75 would be at the rate of 25%, with the residual excess fund retained in the scheme to provide taxable pension income.
This also means that lump sum death benefits paid after age 75, even from unused funds, will be subject to the 55% tax charge - unless it's a charity lump sum death benefit (which can be paid tax-free).
From 6 April 2011, the following lump sums can also be paid after 75:
•Trivial commutation lump sums;
•Trivial commutation lump sum death benefits;
•Winding up lump sums;
•Serious ill-health lump sums (but only from unused arrangements and subject to a 55% tax charge).
What are the new pension income drawdown rules from 6 April 2011?
On 6 April 2011, the unsecured pension (USP) and alternatively secured pension (ASP) rules were replaced by a new single set of income drawdown rules that are similar to the current USP rules. The key features of the new rules are as follows:
Income limits
•The highest income allowed in a pension year is 100% of the basis amount from the GAD tables at all ages (down from the 120% USP limit, but up from the 90% ASP limit).
•The lowest yearly income allowed is nil (the same as the USP rules, but significantly more flexible than the 55% minimum that had to be taken under the current ASP rules).
Those who meet the new minimum income requirement (MIR) may also have the option of flexible drawdown, which allows unlimited income to be taken at any time.
The GAD tables have been updated to reflect recent mortality improvements and extended to cover ages after 75.
Income reviews
•Until age 75, the income limit must be reviewed at least every three years.
•Once over 75, the limit must be reviewed every year.
Death benefits
•Lump sum death benefits are allowed from income drawdown funds at any age (a welcome relaxation for the over 75s).
•For deaths after 5 April 2011, any lump sum death benefit paid from an income drawdown fund (or after age 75 from unused funds) are taxed at 55% (up from the 35% that previously applied under USP). Lump sums paid on or after 6 April 2011 as a result of a death in USP before then will still be taxed at 35%.
Timing
•The new rules apply immediately to any arrangement moved into income drawdown for the first time after 5 April 2011.
•People in USP or ASP before 6 April 2011 will be moved fully onto the new rules over a period of up to 5 years under transitional rules.
What is pension flexible drawdown?
Flexible drawdown is perhaps the most radical aspect of the new income drawdown rules from 6 April 2011. Under flexible drawdown there's no limit on the amount of income that can be drawn each year - the individual can take their entire income drawdown fund out in one go if they really want to!
The usual tax free lump sum is allowed, but any other withdrawals taken by the individual will be taxed as income in the tax year they're paid. If an individual becomes non-UK resident whilst in flexible drawdown, any income drawn when non-resident will be subject to UK tax if they return to the UK within five tax years of taking it.
To opt for flexible drawdown, an individual must:
•meet the minimum income requirement (which is a safety net, so they won't fall back onto State benefits); and
•not make contributions to a money purchase pension scheme in that tax year - including employer and third party payments; and
•not be an active member of a final salary scheme at the time of making the declaration.
Protected rights
Protected rights funds can use the normal income drawdown basis but can't go into flexible drawdown.
When will the 2011 income drawdown rules apply to existing unsecured or alternatively secured pensions?
People already in unsecured pension (USP) or alternatively secured pension (ASP) before 6 April 2011 will be moved fully onto the new income drawdown rules over a period of up to 5 years.
Unsecured pension (USP) - income limits
Those in USP on 5 April 2011 will keep the 120% income limit until the earliest of:
•Next reference period: The start of their first new reference period (that is, when their five year review falls due or at any earlier interim annual review); or
•Drawdown transfer: The start of their next drawdown year after transferring their drawdown fund; or
•Age 75: The start of their next pension year after age 75.
New phasing, part annuitisation or pension sharing after 5 April 2011 will still trigger an income review. The limit will be calculated using the new GAD tables, but the maximum income will still be 120% of this revised amount. This review won't change the five year reference date or trigger a move to the new 100% income limit.
So someone who goes into USP before 6 April 2011, or resets their five year reference period by requesting an interim review on the anniversary of their drawdown year before 6 April 2011, may not move onto the lower 100% income limit and more frequent reviews until well after 2011.
Alternatively secured pension (ASP) - income limits
Those in ASP on 5 April 2011 will have their first income review using the new rules at the start of their next pension year.
•Until then, the basis amount calculated at their last income review will remain in force.
•However they can switch off their income, or increase it to 100% of their existing basis amount, immediately from 6 April 2011.
How have the pension death benefit rules changed from 6 April 2011?
From 6 April 2011, there are some significant changes to the pension death benefit rules:
•Lump sum death benefits are allowed at any age.
•For deaths after 5 April 2011, the tax charge on lump sum death benefits paid from crystallised rights is 55% (up from the current 35%).
•Tax-free charity lump sum death benefits are allowed in more circumstances.
•The scope for an IHT charge against pension rights has been narrowed.
Death benefits paid from 6 April 2011 relating to a death before then are still be covered by the old rules.
Death before age 75
On death after 5 April 2011 aged less than 75, any lump sum death benefit is:
•still tax free if paid from uncrystallised rights;
•but normally taxed at 55% if paid from crystallised rights (such as income drawdown funds or a value protected annuity). The only exception is for charity lump sum death benefits, which can be paid tax-free from crystallised rights.
Death on or after age 75
On death after 5 April 2011 aged 75 or over, it's okay to pay lump sum death benefits. This is a sea-change from the previous position on death in alternatively secured pension (ASP), where only a charity could legitimately have benefited from a lump sum on death.
•Any lump sum death benefit paid after 75 (including those from unused funds) is taxed at 55%.
Charity lump sum death benefits
Before 6 April 2011, a charity lump sum death benefit could be paid tax free to a nominated charity on death in ASP where there were no surviving dependants. For deaths after 5 April 2011, this option has been extended to cover death in drawdown before age 75.
To qualify as a tax free charity lump sum death benefit, all the following criteria must be met:
•The lump sum is paid from income drawdown funds; and
•There are no surviving dependants of the member to pay a pension to; and
•The deceased member (or dependant) had nominated a recipient charity (it's no longer possible for the scheme administrator to make a nomination).
Lump sums that don't meet these criteria can still be paid to charities, but they will be treated as normal lump sum death benefits - so if they come from crystallised rights the usual 55% tax charge would apply.
IHT
Before 6 April 2011, pension rights could create IHT liabilities - albeit only in fairly limited circumstances. Two significant changes were made from 6 April 2011 that make the risk of IHT charges even smaller:
•The abolition of the ASP rules mean that the IHT charges that previously applied on death in ASP don't apply for deaths after 5 April 2011.
•The ability for HMRC to levy IHT where they consider that someone has deprived their estate through an "omission to act" (for example, by delaying taking their pension) has been removed for omissions after 5 April 2011.
Some important changes were made to the pension benefit rules from 6 April 2011.
In particular:
•Pensions and lump sums no longer have to be taken by age 75;
•New income drawdown rules have replaced the existing unsecured pension (USP) and alternatively secured pension (ASP) rules, which have been abolished;
•A new type of income drawdown, known as flexible drawdown, is available for those who meet the new minimum income requirement (MIR);
•Existing USP and ASP cases will be gradually moved fully onto the new basis under transitional rules;
•The death benefit rules, and aspects of their tax treatment, have changed.
Do pensions and lump sums have to be taken by age 75?
After 5 April 2011, benefits don't have to be taken from a registered pension scheme by age 75 - they can just be left in the scheme as unused funds until the member needs them. Where scheme rules allow, this gives members the flexibility to delay taking their pension or tax-free lump sum until after age 75 - potentially even continuing a phased retirement strategy into their 80s or beyond.
However, the benefits still have to be tested against the lifetime allowance by age 75 (as a benefit crystallisation event). So even though the member may not be taking anything from their fund, if those unused funds are greater than the remaining lifetime allowance, a lifetime allowance tax charge will have to be paid. Any lifetime allowance charge incurred at age 75 would be at the rate of 25%, with the residual excess fund retained in the scheme to provide taxable pension income.
This also means that lump sum death benefits paid after age 75, even from unused funds, will be subject to the 55% tax charge - unless it's a charity lump sum death benefit (which can be paid tax-free).
From 6 April 2011, the following lump sums can also be paid after 75:
•Trivial commutation lump sums;
•Trivial commutation lump sum death benefits;
•Winding up lump sums;
•Serious ill-health lump sums (but only from unused arrangements and subject to a 55% tax charge).
What are the new pension income drawdown rules from 6 April 2011?
On 6 April 2011, the unsecured pension (USP) and alternatively secured pension (ASP) rules were replaced by a new single set of income drawdown rules that are similar to the current USP rules. The key features of the new rules are as follows:
Income limits
•The highest income allowed in a pension year is 100% of the basis amount from the GAD tables at all ages (down from the 120% USP limit, but up from the 90% ASP limit).
•The lowest yearly income allowed is nil (the same as the USP rules, but significantly more flexible than the 55% minimum that had to be taken under the current ASP rules).
Those who meet the new minimum income requirement (MIR) may also have the option of flexible drawdown, which allows unlimited income to be taken at any time.
The GAD tables have been updated to reflect recent mortality improvements and extended to cover ages after 75.
Income reviews
•Until age 75, the income limit must be reviewed at least every three years.
•Once over 75, the limit must be reviewed every year.
Death benefits
•Lump sum death benefits are allowed from income drawdown funds at any age (a welcome relaxation for the over 75s).
•For deaths after 5 April 2011, any lump sum death benefit paid from an income drawdown fund (or after age 75 from unused funds) are taxed at 55% (up from the 35% that previously applied under USP). Lump sums paid on or after 6 April 2011 as a result of a death in USP before then will still be taxed at 35%.
Timing
•The new rules apply immediately to any arrangement moved into income drawdown for the first time after 5 April 2011.
•People in USP or ASP before 6 April 2011 will be moved fully onto the new rules over a period of up to 5 years under transitional rules.
What is pension flexible drawdown?
Flexible drawdown is perhaps the most radical aspect of the new income drawdown rules from 6 April 2011. Under flexible drawdown there's no limit on the amount of income that can be drawn each year - the individual can take their entire income drawdown fund out in one go if they really want to!
The usual tax free lump sum is allowed, but any other withdrawals taken by the individual will be taxed as income in the tax year they're paid. If an individual becomes non-UK resident whilst in flexible drawdown, any income drawn when non-resident will be subject to UK tax if they return to the UK within five tax years of taking it.
To opt for flexible drawdown, an individual must:
•meet the minimum income requirement (which is a safety net, so they won't fall back onto State benefits); and
•not make contributions to a money purchase pension scheme in that tax year - including employer and third party payments; and
•not be an active member of a final salary scheme at the time of making the declaration.
Protected rights
Protected rights funds can use the normal income drawdown basis but can't go into flexible drawdown.
When will the 2011 income drawdown rules apply to existing unsecured or alternatively secured pensions?
People already in unsecured pension (USP) or alternatively secured pension (ASP) before 6 April 2011 will be moved fully onto the new income drawdown rules over a period of up to 5 years.
Unsecured pension (USP) - income limits
Those in USP on 5 April 2011 will keep the 120% income limit until the earliest of:
•Next reference period: The start of their first new reference period (that is, when their five year review falls due or at any earlier interim annual review); or
•Drawdown transfer: The start of their next drawdown year after transferring their drawdown fund; or
•Age 75: The start of their next pension year after age 75.
New phasing, part annuitisation or pension sharing after 5 April 2011 will still trigger an income review. The limit will be calculated using the new GAD tables, but the maximum income will still be 120% of this revised amount. This review won't change the five year reference date or trigger a move to the new 100% income limit.
So someone who goes into USP before 6 April 2011, or resets their five year reference period by requesting an interim review on the anniversary of their drawdown year before 6 April 2011, may not move onto the lower 100% income limit and more frequent reviews until well after 2011.
Alternatively secured pension (ASP) - income limits
Those in ASP on 5 April 2011 will have their first income review using the new rules at the start of their next pension year.
•Until then, the basis amount calculated at their last income review will remain in force.
•However they can switch off their income, or increase it to 100% of their existing basis amount, immediately from 6 April 2011.
How have the pension death benefit rules changed from 6 April 2011?
From 6 April 2011, there are some significant changes to the pension death benefit rules:
•Lump sum death benefits are allowed at any age.
•For deaths after 5 April 2011, the tax charge on lump sum death benefits paid from crystallised rights is 55% (up from the current 35%).
•Tax-free charity lump sum death benefits are allowed in more circumstances.
•The scope for an IHT charge against pension rights has been narrowed.
Death benefits paid from 6 April 2011 relating to a death before then are still be covered by the old rules.
Death before age 75
On death after 5 April 2011 aged less than 75, any lump sum death benefit is:
•still tax free if paid from uncrystallised rights;
•but normally taxed at 55% if paid from crystallised rights (such as income drawdown funds or a value protected annuity). The only exception is for charity lump sum death benefits, which can be paid tax-free from crystallised rights.
Death on or after age 75
On death after 5 April 2011 aged 75 or over, it's okay to pay lump sum death benefits. This is a sea-change from the previous position on death in alternatively secured pension (ASP), where only a charity could legitimately have benefited from a lump sum on death.
•Any lump sum death benefit paid after 75 (including those from unused funds) is taxed at 55%.
Charity lump sum death benefits
Before 6 April 2011, a charity lump sum death benefit could be paid tax free to a nominated charity on death in ASP where there were no surviving dependants. For deaths after 5 April 2011, this option has been extended to cover death in drawdown before age 75.
To qualify as a tax free charity lump sum death benefit, all the following criteria must be met:
•The lump sum is paid from income drawdown funds; and
•There are no surviving dependants of the member to pay a pension to; and
•The deceased member (or dependant) had nominated a recipient charity (it's no longer possible for the scheme administrator to make a nomination).
Lump sums that don't meet these criteria can still be paid to charities, but they will be treated as normal lump sum death benefits - so if they come from crystallised rights the usual 55% tax charge would apply.
IHT
Before 6 April 2011, pension rights could create IHT liabilities - albeit only in fairly limited circumstances. Two significant changes were made from 6 April 2011 that make the risk of IHT charges even smaller:
•The abolition of the ASP rules mean that the IHT charges that previously applied on death in ASP don't apply for deaths after 5 April 2011.
•The ability for HMRC to levy IHT where they consider that someone has deprived their estate through an "omission to act" (for example, by delaying taking their pension) has been removed for omissions after 5 April 2011.
Any reference to legislation and tax is based on our understanding of United Kingdom law and HM Revenue & Customs practice at the date of production. These may be subject to change in the future. Tax rates and reliefs may be altered. The value of tax reliefs to the investor depends on their financial circumstances. No guarantees are given regarding the effectiveness of any arrangements entered into on the basis of these comments.
Tuesday, 12 July 2011
Annuities, are they all bad?
Henry purchased his annuity (income for life) in 1962 and it paid out, year after year, until Henry passed away in 2010
– 48 years of income.
Annuities generally get a bad press, mostly based around the fact you lose control of a lump sum and if you die you lose the lot with nothing passing to your family.
They are the perceived bad points and whilst true in part do not tell the whole story.
The perception of losing control of a lump sum is not always true, especially if the annuity is purchased from a pension. Perhaps this is the fault of the pension providers who always give us an annual statement with a lump sum figure, yet we should understand from the day we start paying into a private pension it is only ever (under today’s rules) a quarter of the accrued amount that will be payable as a tax free lump sum. The remainder has to be paid as taxable income.
This blog post is not meant to be pro-annuity – As with all my work I remain neutral, preferring not to let personal perspectives get in the way of doing whatever is best and most suitable for any given client at any given time. The aim of this article is just to point out a few positive aspects of annuities I have found in the course of my work, the first being for those that live longer, and we are told life expectancy is increasing all the time, an annuity can represent fantastic value for money.
Living too long or Running out of money
In many ways an annuity could be likened to buying insurance. One is insuring oneself against ‘living too long’, or to put it another way, running out of money.
When financial planning for clients, aiming to generate and provide income for life, one of the greater challenges I face on their behalf is to balance the risk and reward profile, keeping enough money in reserve to fall back on whilst investing in assets that will outpace inflation, thus retaining standard of living and purchasing power as time goes by.
An index linked annuity can address this, providing a definite source of income, for the remainder of life, increasing in line with inflation.
That said, annuity rates today are much lower than in the last 20 or 30 years or so, their rates being closely allied to interest rates and inflation. At the same time life expectancy has increased. In 1970 a man retiring at 65 could expect to receive a pension for 14 years. Today that is expected to be nearer 24 years of payment.
Without going into the maths and actuarial reasons (but for the more technically minded it is known, rather brutally, as ‘mortality drag’) there is a form of cross subsidy at work with annuities whereby, in simple terms, those that die soon after purchasing an annuity subsidise those that live a long time. The approximate cost of this for someone entering Pension Income Drawdown (see other blog posts for more info on this product) is around 0.5% at age 60 – a small price to pay? It rises to around 1% by age 70. However by age 85 the cost is around 5%. So the decade between age 70 and 80 is sometimes referred to as the ‘Annuity Age’ when it may well be sensible to convert pensions to annuities (but always take individual, professional, fee based advice on this)
Another positive for annuities is the simplicity they bring in financial planning, alongside the certainty. A regular, trackable, easy to understand level of income without any concerns over investment performance or otherwise to sustain that income.
But is there an optimum amount, what with the income being taxable? Arguably if you could keep your annuity income under the higher rate tax threshold and create other income that was non taxable elsewhere it may prove tax advantageous for you, especially if you received higher rate tax relief on the way in (in simple term, under current rules, tax relief of 40% on the way in, and only paying tax at 20% on the way out). Again, another area perhaps to take individual, professional, fee based advice on.
Another reason to not have ‘too much’ (crazy idea I know) in your pension when buying an annuity is a recent development by annuity providers based on demographics. Amazingly the size of the purchase price now goes against the policyholder! They now reason the size of the fund buying the annuity reflects social status, arguing a large purchase price means a wealthy client, and wealthy people live longer than poor ones.
The astute client will ensure their financial adviser knows this and will investigate whether to help them to purchase annuities in tranches to maximise income from various providers rather than use the full fund at once with one annuity company.
There are many factors to consider when purchasing an annuity. My other blog post today consists of my helpsheet on this matter with areas and variables to consider before purchase.
Watch out when doing a ‘DIY’ job on annuity purchase. ‘best buy’ tables in newspapers and online are often manipulated to show best rates (ie for a man of exactly 65) and if you do not fit the exact criteria you’ll find yourself worse off. It is also unusual to find your pension provider is also the best annuity income provider so don’t just buy from them, especially if a bank product. Shop around (see other blog post today).
Consider engaging a financial adviser with specialist annuity research software who can pinpoint the annuity provider who will give you the most money (known as exercising your ‘open market option’) for your unique, personal position. Make sure they charge a fee for this service so you can be sure they are not being swayed by a later commission on an annuity purchase. If you wish the adviser to subsequently help with the annuity purchase transaction and implementation, again look for a fee charging adviser so all your money is at work generating you income, not paying a commission.
In summary, conventional annuities are an excellent way of securing a fixed income for life, with or without things such as inflation linking or benefits for dependents. A series of annuities may work well too, especially for those leaving Income Drawdown pensions as time goes on.
Annuities are certainly not the right answer for all of the people, all of the time,
but they definitely are the right answer for some of the people, some of the time.
Ask yourself, when should you buy an annuity?
Just in case, like Henry Allington, you live to be 113 or older.
Shopping around for lifetime annuities
The Open Market Option
Annuity rates vary from one life company to another, so you should make sure you shop around to get the best deal for you. There are a few things to think about first.
• If you're getting a pension from a personal pension arrangement, your pension provider should send you information between four and six months before you are due to retire, setting out what they will offer you based on the value of your fund. They will also tell you that you can shop around for a higher annuity. About six weeks before you retire your pension provider should give you an estimate of the value of your fund. You can use this to compare products from other providers. This is known as your open market option.
• Don’t assume the same company with which you built up your fund will automatically offer you the best rate. You may do better to shop around and check whether another company could offer you more. The annuity rate you get can affect your income by hundreds of pounds a year for the rest of your life.
• If you're getting a pension from an occupational defined contribution pension scheme, the trustees may buy your annuity for you, but you can also shop around on the open market and find the insurance company with the best annuity rate for you, or your scheme trustees can do this for you if you ask.
It can be difficult or impossible to change your lifetime annuity provider after you've bought your lifetime annuity, so take some time to choose the one that’s right for you.
Check what your existing provider offers
Before shopping around, make sure you understand what your existing provider is offering you. Check:
• whether your provider offers a guaranteed annuity rate. This is not the same as a guarantee period. A guaranteed annuity rate means that the provider has to offer a minimum annuity rate for your pension fund. Now that annuity rates are a lot lower than in the past, a guaranteed annuity rate can be very valuable and could give a higher retirement income than can currently be bought on the open market;
• whether your provider will charge your fund if you buy your annuity from another company.
Your existing provider will usually give you a quote for a specific type of annuity. Make sure you get a quote for the type of annuity you want, not just the one the provider offers you.
How long have you got?
Annuity quotes are usually valid for between 7 and 28 days.
If you change your mind – you may have the right to withdraw or cancel. If so, the provider will tell you and also tell you how quickly you must act.
Shopping around for your annuity
1. Get an estimate of the value of your pension fund, taking account of any charges, from your provider.
2. Decide whether you want to take a tax-free lump sum, and if so, how much (usually up to a quarter of your fund). If you decide to take a tax-free lump sum, deduct it from the pension fund value your pension provider gives you.
3. Decide whether you want:
o a single or joint-life annuity. If joint life, whether the pension paid to your partner is paid in full or reduced (say by a third) – or
o a level or escalating annuity
4. Think about whether you want your annuity to continue to be paid for a specific number of years (5 or 10), should you die shortly after you buy it.
5. Does your fund need to be a certain size to qualify for the better rates offered by another company? Some firms may not be interested in providing an annuity for small sums.
6. Are you a smoker? If you are, you may get a better rate from some annuity providers.
7. Do you have a medical condition that could reduce your life expectancy? If you do, you may get a better rate from some annuity providers. Some providers of impaired life annuities will also accept pension funds of less than £5,000.
You should now have the facts you need to get quotes from a range of providers.
Or we can do it for you – contact us to discuss our fees for this service
Annuity rates vary from one life company to another, so you should make sure you shop around to get the best deal for you. There are a few things to think about first.
• If you're getting a pension from a personal pension arrangement, your pension provider should send you information between four and six months before you are due to retire, setting out what they will offer you based on the value of your fund. They will also tell you that you can shop around for a higher annuity. About six weeks before you retire your pension provider should give you an estimate of the value of your fund. You can use this to compare products from other providers. This is known as your open market option.
• Don’t assume the same company with which you built up your fund will automatically offer you the best rate. You may do better to shop around and check whether another company could offer you more. The annuity rate you get can affect your income by hundreds of pounds a year for the rest of your life.
• If you're getting a pension from an occupational defined contribution pension scheme, the trustees may buy your annuity for you, but you can also shop around on the open market and find the insurance company with the best annuity rate for you, or your scheme trustees can do this for you if you ask.
It can be difficult or impossible to change your lifetime annuity provider after you've bought your lifetime annuity, so take some time to choose the one that’s right for you.
Check what your existing provider offers
Before shopping around, make sure you understand what your existing provider is offering you. Check:
• whether your provider offers a guaranteed annuity rate. This is not the same as a guarantee period. A guaranteed annuity rate means that the provider has to offer a minimum annuity rate for your pension fund. Now that annuity rates are a lot lower than in the past, a guaranteed annuity rate can be very valuable and could give a higher retirement income than can currently be bought on the open market;
• whether your provider will charge your fund if you buy your annuity from another company.
Your existing provider will usually give you a quote for a specific type of annuity. Make sure you get a quote for the type of annuity you want, not just the one the provider offers you.
How long have you got?
Annuity quotes are usually valid for between 7 and 28 days.
If you change your mind – you may have the right to withdraw or cancel. If so, the provider will tell you and also tell you how quickly you must act.
Shopping around for your annuity
1. Get an estimate of the value of your pension fund, taking account of any charges, from your provider.
2. Decide whether you want to take a tax-free lump sum, and if so, how much (usually up to a quarter of your fund). If you decide to take a tax-free lump sum, deduct it from the pension fund value your pension provider gives you.
3. Decide whether you want:
o a single or joint-life annuity. If joint life, whether the pension paid to your partner is paid in full or reduced (say by a third) – or
o a level or escalating annuity
4. Think about whether you want your annuity to continue to be paid for a specific number of years (5 or 10), should you die shortly after you buy it.
5. Does your fund need to be a certain size to qualify for the better rates offered by another company? Some firms may not be interested in providing an annuity for small sums.
6. Are you a smoker? If you are, you may get a better rate from some annuity providers.
7. Do you have a medical condition that could reduce your life expectancy? If you do, you may get a better rate from some annuity providers. Some providers of impaired life annuities will also accept pension funds of less than £5,000.
You should now have the facts you need to get quotes from a range of providers.
Or we can do it for you – contact us to discuss our fees for this service
Tuesday, 15 February 2011
for Green Financial pension drawdown clients
Changes to Income Drawdown / Income Withdrawal type pension arrangements
Please note this post is intended to be an introduction for my existing clients. It is intended to be a brief guide and summary, not an all encompassing technical piece nor should it be taken as specific personal financial advice in any way!
April 6th 2011, the next tax year, heralds new income limits on drawdown plans.
The legislative changes are complex in part and with many of the new proposals (such as so-called ‘flexible drawdown’) many pension providers are unlikely to finalise their products to match the new legislation until well into the new tax year.
One of the major changes will be income limits – The most headline worthy change is that “maximum income on capped drawdown plans will decrease from 120% to 100% of GAD income”
Putting aside for one moment the awful acronyms and jargon that simply means maximum income for most people will fall by around 16%
However, some clients may benefit from preserving the old (higher) limits on their plan for as long as possible. This is likely to mean 5 years – that being the maximum ‘deferral time’ before the new limits MUST apply.
Depending on your type of plan, provider, anniversary date of plan & your age you may be able to ‘lock-in’ to these higher rates before April.
Remember the income is taxable, so don’t just take it because it is higher for a while – especially if you don’t need it or it pushes you into a higher tax bracket. Don’t be fooled by a ‘buy now while stocks last’ if this doesn’t apply to you. To really mix an old phrase up – ‘Don’t let the change in legislation tail wag the financial planning dog’!
There may be limits on what you can you with your plan and IF you want higher income and IF you want to do this pre-April it MAY be necessary to move your plan to another provider which MAY in itself have a cost. But even this could mean being drawn under the new limits sooner than leaving it where it is – this really is a complex scenario for most people in drawdown.
Even asking for an additional review (if you have already had one in your current pension year) may trigger an admin charge.
So in summary, a lot to think about and many variables all with some fairly lengthy and complex legislation behind it – and with a few future unkowns still lurking about.
If you are happy with your income (it may even be zero at the moment), don't need any more and don't want to draw out as much as possible as soon as possible you may not want to do anything.
But if you wish to discuss your own specific drawdown situation, please contact me.
www.iangreen.com has all the contact points – email, mobile, postal address etc
Action points reminder – with jargon included!
• Clients aged over 55 considering drawing benefits using income withdrawal, should consider crystallisation of benefits before the end of the tax year. This will lock clients into a five-year review based on current GAD limits rather than the rates and the three-year review periods that will apply on crystallisation from 6 April 2011.
• Recycle excess income as a contribution to improve tax efficiency of a client’s retirement funds. The maximum is £3,600 if a client has no relevant earnings, but could be greater where relevant earnings still apply.
• When gifting excess income for this tax year ensure clients take the relevant income withdrawals before the tax-year end. This probably means income withdrawals taken in March 2011.
• Review impact of potential additional designation. This may deliver higher maximum annual income on an existing income withdrawal fund for the rest of the existing five-year period, and will benefit from the potentially higher maximum income limits that will apply on additional designations before 6 April 2011.
• Ensure transfers of income withdrawal arrangements are completed by 5 April 2011 to preserve both the maximum annual income and the remainder of the client's current five year review period.
JARGON BUSTER!
GAD - Government Actuaries Department
GAD rates - maximum income from drawdown is calculated using GAD tables which take into account age and interest rates
crystallisation of benefits - in this context mostly means taking tax free cash and/or income withdrawals
flexible drawdown - a new type of drawdown coming in April 6 2011 with no limit but with restrictions on other areas
capped drawdown plans - the name for drawdown plans that are not 'flexible' (see above) - pretty much what plans are now and the type of plan facing the maximum income reduction
pension year - set at outset of policy and relevant to calculating quinquennial review dates. a pension year normally runs in line with the policy anniversary date
reference period - the time between reference dates, currently 5 years and moving (back to) 3 years after April 6 2011
E&OE
Please note this post is intended to be an introduction for my existing clients. It is intended to be a brief guide and summary, not an all encompassing technical piece nor should it be taken as specific personal financial advice in any way!
April 6th 2011, the next tax year, heralds new income limits on drawdown plans.
The legislative changes are complex in part and with many of the new proposals (such as so-called ‘flexible drawdown’) many pension providers are unlikely to finalise their products to match the new legislation until well into the new tax year.
One of the major changes will be income limits – The most headline worthy change is that “maximum income on capped drawdown plans will decrease from 120% to 100% of GAD income”
Putting aside for one moment the awful acronyms and jargon that simply means maximum income for most people will fall by around 16%
However, some clients may benefit from preserving the old (higher) limits on their plan for as long as possible. This is likely to mean 5 years – that being the maximum ‘deferral time’ before the new limits MUST apply.
Depending on your type of plan, provider, anniversary date of plan & your age you may be able to ‘lock-in’ to these higher rates before April.
Remember the income is taxable, so don’t just take it because it is higher for a while – especially if you don’t need it or it pushes you into a higher tax bracket. Don’t be fooled by a ‘buy now while stocks last’ if this doesn’t apply to you. To really mix an old phrase up – ‘Don’t let the change in legislation tail wag the financial planning dog’!
There may be limits on what you can you with your plan and IF you want higher income and IF you want to do this pre-April it MAY be necessary to move your plan to another provider which MAY in itself have a cost. But even this could mean being drawn under the new limits sooner than leaving it where it is – this really is a complex scenario for most people in drawdown.
Even asking for an additional review (if you have already had one in your current pension year) may trigger an admin charge.
So in summary, a lot to think about and many variables all with some fairly lengthy and complex legislation behind it – and with a few future unkowns still lurking about.
If you are happy with your income (it may even be zero at the moment), don't need any more and don't want to draw out as much as possible as soon as possible you may not want to do anything.
But if you wish to discuss your own specific drawdown situation, please contact me.
www.iangreen.com has all the contact points – email, mobile, postal address etc
Action points reminder – with jargon included!
• Clients aged over 55 considering drawing benefits using income withdrawal, should consider crystallisation of benefits before the end of the tax year. This will lock clients into a five-year review based on current GAD limits rather than the rates and the three-year review periods that will apply on crystallisation from 6 April 2011.
• Recycle excess income as a contribution to improve tax efficiency of a client’s retirement funds. The maximum is £3,600 if a client has no relevant earnings, but could be greater where relevant earnings still apply.
• When gifting excess income for this tax year ensure clients take the relevant income withdrawals before the tax-year end. This probably means income withdrawals taken in March 2011.
• Review impact of potential additional designation. This may deliver higher maximum annual income on an existing income withdrawal fund for the rest of the existing five-year period, and will benefit from the potentially higher maximum income limits that will apply on additional designations before 6 April 2011.
• Ensure transfers of income withdrawal arrangements are completed by 5 April 2011 to preserve both the maximum annual income and the remainder of the client's current five year review period.
JARGON BUSTER!
GAD - Government Actuaries Department
GAD rates - maximum income from drawdown is calculated using GAD tables which take into account age and interest rates
crystallisation of benefits - in this context mostly means taking tax free cash and/or income withdrawals
flexible drawdown - a new type of drawdown coming in April 6 2011 with no limit but with restrictions on other areas
capped drawdown plans - the name for drawdown plans that are not 'flexible' (see above) - pretty much what plans are now and the type of plan facing the maximum income reduction
pension year - set at outset of policy and relevant to calculating quinquennial review dates. a pension year normally runs in line with the policy anniversary date
reference period - the time between reference dates, currently 5 years and moving (back to) 3 years after April 6 2011
E&OE
Thursday, 9 December 2010
Crikey! - Good News on Pensions
Today, the government has given more details of how it is planning to make changes to pension legislation from April 2011.
These include:
• no specific age deadline for buying an annuity
• a cap on the amount "drawndown" annually from a pension pot by an individual without buying an annuity
• a withdrawal of this cap if the individual can prove they have enough income to never run out and rely on the state.
The level set for this cap, and the minimum income required for the cap to be taken away, will be part of an eight-week consultation on the proposals.
Regular readers and clients of Green Financial would have been aware that there was an interim measure announced in the budget that increased the maximum annuity age from 75 to 77.
Assuming the new proposals get through Parliament the new rules should be in place by April 2011.
One of the best announcements, in my opinion, was the removal for many of income drawdown limits. As long as a lifetime income of £20,000+ can be secured, there will be no limit. In effect, you’ll have to show that you won’t run your fund down to nothing and THEN go cap in hand to the state for benefits. Thus rewarding those that save a decent sum into their pension, letting them extract a level more commensurate with what they were used to during their working lifetime.
There is a sting in the tail – tax on death benefits looks set to rise to 55% from 35% thus making any kind of pension related / inheritance tax loopholes look unlikely but this is a fair trade off given the positives and the real purpose of pensions ie to provide income in retirement, not to bypass inheritance tax for future generations
It remains to be seen what the actual effect of deferring annuity purchase past 75 will be as ‘mortality drag’ may have a detrimental impact.
Mark Hoban, financial secretary to the Treasury says "The more you save for retirement, the more control and flexibility you will have and ultimately, the more you will be able to pass on to your family on death. Combined with the tax breaks available on pensions, these simple messages will be very popular with investors."
To encourage people to take greater responsibility for their financial future, including in retirement, we need to give people greater flexibility over how they use the savings they have accumulated”
I started on a positive but cynically perhaps, will finish on a slight negative. Let’s hope, unlike so much other recent legislative change, that the positive ‘headlines’ are not undermined with negative detail. More on the new proposals as the details emerge…
Ian Green
These include:
• no specific age deadline for buying an annuity
• a cap on the amount "drawndown" annually from a pension pot by an individual without buying an annuity
• a withdrawal of this cap if the individual can prove they have enough income to never run out and rely on the state.
The level set for this cap, and the minimum income required for the cap to be taken away, will be part of an eight-week consultation on the proposals.
Regular readers and clients of Green Financial would have been aware that there was an interim measure announced in the budget that increased the maximum annuity age from 75 to 77.
Assuming the new proposals get through Parliament the new rules should be in place by April 2011.
One of the best announcements, in my opinion, was the removal for many of income drawdown limits. As long as a lifetime income of £20,000+ can be secured, there will be no limit. In effect, you’ll have to show that you won’t run your fund down to nothing and THEN go cap in hand to the state for benefits. Thus rewarding those that save a decent sum into their pension, letting them extract a level more commensurate with what they were used to during their working lifetime.
There is a sting in the tail – tax on death benefits looks set to rise to 55% from 35% thus making any kind of pension related / inheritance tax loopholes look unlikely but this is a fair trade off given the positives and the real purpose of pensions ie to provide income in retirement, not to bypass inheritance tax for future generations
It remains to be seen what the actual effect of deferring annuity purchase past 75 will be as ‘mortality drag’ may have a detrimental impact.
Mark Hoban, financial secretary to the Treasury says "The more you save for retirement, the more control and flexibility you will have and ultimately, the more you will be able to pass on to your family on death. Combined with the tax breaks available on pensions, these simple messages will be very popular with investors."
To encourage people to take greater responsibility for their financial future, including in retirement, we need to give people greater flexibility over how they use the savings they have accumulated”
I started on a positive but cynically perhaps, will finish on a slight negative. Let’s hope, unlike so much other recent legislative change, that the positive ‘headlines’ are not undermined with negative detail. More on the new proposals as the details emerge…
Ian Green
Monday, 18 October 2010
Dear Diary, Monday
I was so busy last week I didn’t have time to blog.
So this week I thought I’d write up a diary of last week to give a little insight as to what I get up to, where I do it and who I do it with!
Monday 11th October
Having made my son what I thought was a breakfast fit for a hard day at school, a delicious bowl of porridge with chopped bananas, I was greeted with the response that ‘he’d rather have coco pops’. Now I know how Jamie Oliver feels!
A busy retirement
The working week then began with a meeting in the Putney office with a client who recently retired from a career in banking. As with many retired clients he seems to be busier now than when he was working!
The meeting was around the ongoing management of an investment portfolio and the portfolio construction for the pension retirement income. As is usual in situations such as this we also strayed into estate planning matters. I now have a number of questions to answer and finer details to clarify before we proceed further.
Family Matters
Then a dash out of the office to the train station (anyone who is also on www.foursquare.com could track me at this point!) and to ‘Sunny Brighton’.
The pleasure of meeting a prospective new client was tinged with sadness at the circumstances. Too often tragedy strikes when we least expect it and this gentleman was dealing with a recent bereavement of a too young wife and mother to a too young family.
Despite the circumstances the time together was positive and I feel well able to help (in purely financial matters only) the family move on from what has happened and position themselves for their future.
Life is a jigsaw
Then straight back to Putney for a meeting in the office with a client that I have only fairly recently started working with. It has taken the best part of six months to unravel their previous financial position thanks to the existing providers giving almost no information on small matters like performance or costs! We have started to work out a plan to determine if they have enough money to last a lifetime. A huge part of my work is helping people to discover “How much is enough?”. With this client the pieces of the jigsaw are almost all in place but to continue the analogy there seems to be a corner piece missing. I have left them with a few questions and if the answers are positive then we’ll complete the jigsaw and admire the view – but if the answers are not as hoped we may well be scrabbling around on the floor or simply hoping to find the missing piece down the back of the sofa…
Injury Time
Monday finishes with a particularly pleasing event for me. My first game of squash for over six months, thanks to a knee injury in the spring and then tearing an ankle ligament in the summer after falling – and in case you wonder the fall was non-sports related - and also non alcohol related before you ask!
To hammer home the time that had passed my regular squash partner had no idea I had set up Green Financial as a stand alone entity and last time we played my wife and I had just had the 12 week scan for the new baby, now due any week!
The score on the night: Well, that’s not important. It’s the taking part that counts…
So this week I thought I’d write up a diary of last week to give a little insight as to what I get up to, where I do it and who I do it with!
Monday 11th October
Having made my son what I thought was a breakfast fit for a hard day at school, a delicious bowl of porridge with chopped bananas, I was greeted with the response that ‘he’d rather have coco pops’. Now I know how Jamie Oliver feels!
A busy retirement
The working week then began with a meeting in the Putney office with a client who recently retired from a career in banking. As with many retired clients he seems to be busier now than when he was working!
The meeting was around the ongoing management of an investment portfolio and the portfolio construction for the pension retirement income. As is usual in situations such as this we also strayed into estate planning matters. I now have a number of questions to answer and finer details to clarify before we proceed further.
Family Matters
Then a dash out of the office to the train station (anyone who is also on www.foursquare.com could track me at this point!) and to ‘Sunny Brighton’.
The pleasure of meeting a prospective new client was tinged with sadness at the circumstances. Too often tragedy strikes when we least expect it and this gentleman was dealing with a recent bereavement of a too young wife and mother to a too young family.
Despite the circumstances the time together was positive and I feel well able to help (in purely financial matters only) the family move on from what has happened and position themselves for their future.
Life is a jigsaw
Then straight back to Putney for a meeting in the office with a client that I have only fairly recently started working with. It has taken the best part of six months to unravel their previous financial position thanks to the existing providers giving almost no information on small matters like performance or costs! We have started to work out a plan to determine if they have enough money to last a lifetime. A huge part of my work is helping people to discover “How much is enough?”. With this client the pieces of the jigsaw are almost all in place but to continue the analogy there seems to be a corner piece missing. I have left them with a few questions and if the answers are positive then we’ll complete the jigsaw and admire the view – but if the answers are not as hoped we may well be scrabbling around on the floor or simply hoping to find the missing piece down the back of the sofa…
Injury Time
Monday finishes with a particularly pleasing event for me. My first game of squash for over six months, thanks to a knee injury in the spring and then tearing an ankle ligament in the summer after falling – and in case you wonder the fall was non-sports related - and also non alcohol related before you ask!
To hammer home the time that had passed my regular squash partner had no idea I had set up Green Financial as a stand alone entity and last time we played my wife and I had just had the 12 week scan for the new baby, now due any week!
The score on the night: Well, that’s not important. It’s the taking part that counts…
Tuesday, 29 June 2010
Income Drawdown and a Masterpiece
Another step forwards in the online world - my first blog...
What to say , what to say, especially when I know no-one is reading this...
Currently finalising paperwork for a complex Income Drawdown case. Essential paperwork is completed in right order as anything else could impact on tax free cash available.
Super work from my colleague as well as liaising with one of the best occupational pension scheme administrators I have ever dealt with means there should be no problems and all will go to plan.
Off to the Masterpiece fair once work completed - Also aiming to have LinkedIn, Twitter and this new blog all updating concurrently as well as showing on the almost-ready-to-go-live new website.
Digital Fingers Crossed...
What to say , what to say, especially when I know no-one is reading this...
Currently finalising paperwork for a complex Income Drawdown case. Essential paperwork is completed in right order as anything else could impact on tax free cash available.
Super work from my colleague as well as liaising with one of the best occupational pension scheme administrators I have ever dealt with means there should be no problems and all will go to plan.
Off to the Masterpiece fair once work completed - Also aiming to have LinkedIn, Twitter and this new blog all updating concurrently as well as showing on the almost-ready-to-go-live new website.
Digital Fingers Crossed...
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