This article is all about your annuity options; best UK pension annuity rates, etc., and how you are informed as you approach retirement. First, under disclosure regulations your existing pension company is required to send retirement option letters to you in a prescribed format, both at 5 months and 6 weeks before your Selected Pension Age. There is a summary of the options available; you can choose to 1) Take a pension commencement lump sum (PCLS, or tax-free cash lump sum), 2) Start taking pension benefits using one of the following options: (i) A lifetime annuity (typically conventional) using the Open Market Option, (ii) A short-term annuity, (iii) Income withdrawal before age 75 (unsecured pension), (iv) Income withdrawal from age 75, or 3) Not buy an annuity if you have a smaller pension funds (triviality lump sum), or 4) You could choose to do nothing if you are aged under 75.
These are a brief overview of the annuity options available. You might wish to take advice to investigate what route is best for your individual circumstances. You could take a pension commencement lump sum (PCLS); normally a maximum of 25% of your pension fund value, or the standard Lifetime Allowance if that is lower, can be taken as a PCLS before age 75. However, it may be possible to take more than this 25% figure, if you were entitled to a higher amount under previous pension plan rules. In addition to this cash sum any residual pension funds you might have must be used to provide an income from the following options.
You could start taking pension benefits using one of the following income options; (a) A lifetime Annuity using the OMO – this is an annuity which guarantees regular income payments until you die. There are a number of different lifetime annuities available. It is important to note that choosing any of these options would affect the initial income that you would receive from your annuity. If you are in ill-health or smoke, enhanced UK annuity rates might be more appropriate.
You could take a level or escalating annuity, where the annuity income payments stay at the same level or increase each year by a set percentage, or by the RPI. Then there are guaranteed annuities, where annuity income payments are guaranteed for five or ten years. If you die within the selected period, income will continue to be payable to your estate. And there are dependants’ annuities where all, or a proportion of annuity payments continue to be paid to your spouse, partner, or dependant on your death. Whichever, it is important that you secure the best annuity rates.
With a short-term annuity you get regular income payments for up to five years. The income payments must finish before your 75th birthday. If you purchase a short-term annuity you cannot take a PCLS. With income withdrawal before age 75 you can withdraw income from your pension fund without purchasing a lifetime annuity or a short-term annuity. Under current pension rules, the level of retirement income that you can draw ranges from 0%-120% of the applicable annuity rates. The income must stop when you reach age 75. You will then have to buy a lifetime annuity or choose what is known as an Alternatively Secured Pension (ASP). With income withdrawal from age 75 (Alternatively Secured Pension (ASP)) the level of income that you can draw ranges from 55% to 90% of the relevant annuity rate, under current pension regulations. However, there are no guarantees as to how long these income withdrawals can actually be maintained, as this depends on the investment performance of the pension fund.
With smaller pension funds (the triviality lump sum) that are less that 1% of the standard Lifetime Allowance (i.e. less than £17,500 for the 2009/10 financial year) you can receive the whole pension fund as a cash sum if you are between the ages of 60 and 75, and therefore not buy an annuity. 25% of the cash sum will be tax-free and the rest will be taxed as income provided that you cash in all your pension funds within 12 months of the initial payments. And, if you are under age 75, you can choose to leave your pension alone and take benefits at a later date, providing you use your pension fund to buy some form of benefits by age 75.
