It used to be the case that retirement choices for personal pension holders revolved around what type of annuity (product) to buy, and whether they needed to give up some annuity income to provide death benefits for a spouse and / or dependents, as well as whether to have a level or index-linked income?
People would usually end up taking an annuity from their existing pension provider, which was often a lower income rate than they would have had from the ‘open market’.
Changes from 6th April 2015
From 6th April 2015 the whole story changed, with a raft of new pension laws rolled out introducing ‘flexi-access drawdown’ as a mainstream alternative to annuity purchase.
From a death benefits perspective, one of the surprising but very welcome changes is that pension holders can now leave the whole of their pension fund to any dependent or beneficiary tax free – as opposed to a previously-applied 55% tax charge in many circumstances.
No longer shoe-horned into purchasing an annuity, in theory, people can now pull out the entire pot in one hit… which would undoubtedly be a bad move for most, particularly people with little other pension provision. It’s also worth noting that most of the withdrawal would be counted as income and taxed at marginal rate (which could be up to 45%).
Guaranteed income or capital
Partly as a result of the long-standing dissatisfaction with some of the more inflexible aspects of an Annuity, as well as the uncertainty involved in the investment and other risks inherent in a Drawdown contract, a 3rd ‘mainstream’ alternative of ‘Guaranteed Income’ or Capital has quietly evolved in the UK over the past 9 years, and is set to become an increasingly popular choice for funding retirement income for a significant portion of the UK population.
Among the people likely to benefit from some of the different ‘Guarantee’ plans available are:
- People who require a guaranteed secure income for life, who want to retain investment opportunities and do not wish to take an annuity (at least for the time being) and who require death benefits to pass on,
- People who require investment growth ‘locked in’ regularly, with no investment performance risk to the income base
Flexible Drawdown (Flexi Access)
As a rule of thumb, drawdown will suit those who have a bigger appetite for risk, as it generally involves staying invested for longer and shouldering some investment volatility. Also it may be of greater appeal to those with other retirement income provisions, and thus a higher capacity to cope with potential loss, particularly in volatile times as we’ve seen throughout 2015 and into 2016.
‘Flexible Drawdown’ (Flexi Access) is now available to all, meaning that pension savers have the freedom to access their pension pots pretty much as they wish, though the suitability of ‘drawdown’ will depend very much on individual circumstances, and because of the vast array of options available, seeking independent advice is strongly recommended by the Government. The greater the choices available, the more chance of making the wrong one!
Nonetheless, and despite the ‘middle ground’ between Flexible Drawdown and Annuity apparently occupied by the Guarantee companies, don’t write off annuities completely, as the providers that survived the advent of the pension changes have shown a will to survive and innovate, and for as long as there are clients who will still want a guaranteed income for life, for at least part of their pension requirements, without the need or desire to review or the option to change, then the annuity will live on!