On The MeaningfulMoney Youtube channel, chartered financial planner Pete Matthew discussed the options that people can take when thinking of retirement income and the best methods depending on what people want. He compared drawdown, annuities and uncrystallised funds pension lump sums (UFPLS) and suggested when people could choose these options.
Britons could opt for an annuity as it is “the simplest option”, however he said it is also the most final.
With annuities, people hand over their pension pots in return for an income for life, however no one knows how long they will live.
He said: “If we die early, we may have had a pretty rough deal, handing a pot of money over and then not getting enough income out in return.”
The “main benefit” is the guaranteed income. If people want to ensure they always have the income they need, this is an option to consider, he said.
READ MORE: PIP rates are rising next month – how much more you could get
He suggested that people shop around for the best annuity rate so they can get the most income for their fund.
The “big thing” to be aware of with annuities is that “your pension fund is gone” so the decision is a “big deal”.
If people want the freedom to chose how much to draw from their fund and when, then Flexi-access drawdown could be “a great option”.
People have the option to take tax free cash and what is left can be invested to grow for the future while also being able to provide a taxable, flexible income when people need it.
DON’T MISS
People can move their entire fund into drawdown in one go, or in stages leaving some money uncrystallised and only going into drawdown with a portion of it.
Crystallisation refers to the process of cashing in a pension, from which people can take a tax-free lump sum of up to 25 percent.
Only taking bits of the pension at a time can give people multiple opportunities to take tax free cash every time they crystallise a bit more of their fund.
This can preserve one’s funds for longer and this is beneficial as pension money is outside one’s estate for inheritance tax purposes, so this money can be passed to a partner or children flexibly.
Mr Matthew explained that the downside is that with drawdowns people have to actively manage their investments and their rate of withdrawal if they they don’t want to erode their pension completely.
People can also chose to take uncrystallised funds pension lump sums (UFPLS). This is a way of taking pension benefits from money purchase pensions without opening a drawdown account.
Under the UFPLS option, an individual can take their uncrystallised pension funds in one go, or as a series of 25 percent tax free lump sums.
If people have other retirement income sources that meet their needs such as the state pension or rental income, and they do not need to dip into their other pensions regularly, this can save the cost and hassle of managing a drawdown account.
Mr Matthew said: “Many people blend these options for an optimum approach to retirement so they might secure some basic level assurance with an annuity and then use Flexi access drawdown to top that up.
“Somebody with a very low tolerance for risk might dread the idea of leaving money in a drawdown account and prefer the risk free nature of an annuity.
“Most people’s income changes throughout retirement.
“Maybe they retire on one companies scheme, and then another one kicks in five years later so they get a bit more income. And then their state pension a couple years after that so they get a bit more.
“The flexibility options of the pension options now means that you can tailor the process of taking money out of your pension funds to suit your specific circumstances, dialling it up and down as you need.”
For all the latest Business News Click Here
For the latest news and updates, follow us on Google News.
