There are three main considerations when planning your retirement; When can I retire, How much will I need, How should I take my income?
Part of the planning is to try to give you clarity on how your current portfolio value and Pension/ISA contributions are measuring up to your long-term financial goals and objectives.
Your risk and volatility profile is central to this planning as is your capacity for loss. The question is, should your risk approach remain constant through retirement, be reduced or be increased?
When entering retirement and assuming that you do not have a ‘hefty’ guaranteed and inflation linked DB Pension Scheme Income (Final Salary type of pension), your main choice is to either have an Annuity (Guaranteed Income for Life) paid monthly by a Pension provider or to enter into Flexi Drawdown by leaving your Pension invested in the Global Stockmarkets, diversified Geographically and by the three main Asset Types. (Shares, Fixed Interest and Commercial Property).
The ‘drawdown’ portfolio is then actively manged by the selected discretionary fund manager to provide a monthly income and possible capital withdrawals.
An annuity can be set up as a single life or joint life. A single life gives a higher monthly income but when the member dies the income dies with them. A joint life usually has a 50% survivor’s pension which continues after the death of the member.
Other options for an annuity are to have the income flat rate or linked to inflation, you may also have a guaranteed payment period of 5 years or 10 years.
For a Drawdown pension, on the death of the member, the remaining fund may be then bequeathed to anybody chosen by the member, in its entirety. The fund can then be taken as an income or a lump sum (Subject to the completion of the Pension ‘Expression of Wish’ form). If the member dies under age 75, then the fund can be taken either way tax free. If the member dies over age 75, then the fund is subject to tax at the recipient’s highest marginal rate of tax. (Currently, in 2017/18, set as 20%, 40% or 45%).
So Drawdown is more risk than an Annuity but the death benefits (depending on your circumstances) may be better.
It should also be said that if your pension is in the correct type of plan, the monies in the pension are all outside of your estate for Inheritance Tax Calculations.
“If you fail to plan, you plan to fail”.
Monthly / Annually - Frequency of payment
Advance / Arrears - When payment made i.e. if you select annually in arrears the first income payment will be made one year after purchase of annuity.
Single Life - Annuities may be purchased for payment during the lifetime of the owner of the pension and this is known as single life and income is finished on the owner’s death.
Joint Life - The annuity can be purchased to continue to be paid to a spouse/dependant after the pensions owner’s death and this is known as joint life. A joint life pension can continue on the same level as that paid to the pension owner or it can reduce to 2/3, 1/2 or 1/3.
Guarantee - An annuity is designed to cease on death. However, you may purchase a guarantee for 5 or 10 years. This guarantees that payments will continue for the first 5 or 10 years regardless of the owner dying earlier than this.
Level Payment - The annuity will remain paid at the original amount for life.
Escalation - If purchased, the annuity will increase annually at a predetermined rate. This may be 3% pa, 5% pa, or linked to increases in the Retail Price Index (RPI)
Open Market Option (OMO) - You do not have to take the annuity from the current pension provider. You, or your Independent Financial Adviser, are able to search the annuity market for the best income payment.
Enhanced Annuity - If you are a long-term smoker or have an illness, then you may be able to get an increased annuity payment. (There is a reason for this in that they are expecting you to die sooner rather than later)
The more benefit options that are selected, the lower the initial annuity payment may be.
EJ FINANCIAL LTD
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01892 234884 • 020 3657 9079 • 01635 777795
EJ Financial Ltd. Registered in England and Wales No 9370740
Authorised and regulated by the Financial Conduct Authority. We are entered on the Financial Services Register No 670594 at www.fsa.gov.uk/register.
The Financial Conduct Authority does not regulate taxation and trust advice.
The value of your investment can go down as well as up and you may get back less than you have invested.
The information contained within the website is subject to the UK regulatory regime and is therefore primarily targeted at customers in the UK.
NOTE: None of the above constitutes advice, always consult a professional adviser before making any investment decisions.
Please talk to Ted on 01892 234884 or 01635 777795 for further information.
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