2 : 12 - Taking a Retirement Income

Question 1

Individuals who reach state pension age on or after 6 April 2016 are able to defer their state pension based on the following rules:

(3)

Answer 1

• The minimum deferred period is nine weeks.
• Their state pension is increased by 1% for every nine weeks they defer.
• There will no longer be the option to take the deferred amount as a lump sum.

Question 2

If an individual has no need for state pension income because they have decided to work past state pension age, then they could consider what?

Answer 2

Deferring the state pension until they need it.

Question 3

How could deferring a pension help manage income tax liability?

Answer 3

EG: deferring state pension until a point when an individual has moved from being a higher-rate taxpayer to a basic-rate taxpayer

Question 4

What is the NRA?

Answer 4

A normal retirement age (NRA).

Every DB pension scheme will have one.

Question 5

What happens if the client decides to take the pension before this age?

Answer 5

It will normally be subject to the discretion of the trustees and any pension received before the NRA will be reduced by the scheme actuaries.

In addition, any late retirement, post NRA, would be revalued; however, this depends on the scheme rules.

Question 6

What is a major factor when deciding when to commence a DB pension scheme?

Answer 6

Given the often large actuarial reductions applied now as early retirement factors, individuals might use other assets (this could include ISAs, DC pensions and cash) to fund their standard of living until the NRA when they would then access their DB pension.

Question 7

What are some of the options available when an individual has decided it is time to access their DC pension?

Answer 7

EG: purchasing an annuity, UFPLS or FAD

Question 8

Both UFPLS and FAD offer what?

Answer 8

A huge amount of flexibility and the option of phasing retirement income can be used

Question 9

What is phasing?

Answer 9

Phasing is when the member selects a level of income and then sufficient funds are crystallised and placed into drawdown to provide the income required.

Question 10

What can PCLS provide?

Answer 10

An element of tax-free income.

Question 11

What happened under capped drawdown rules?

Answer 11

Pension providers were required to provide a ‘critical yield’ on their illustrations and this showed the investment returns required by a drawdown pension to match the income that could be provided by a traditional annuity.

The critical yield took into account the additional costs of drawdown and mortality drag.

Question 12

What has changed under under FAD or UFPLS contracts?

Answer 12

Pension providers are no longer required to provide a critical yield.

Question 13

What could happen without advice and regular reviews?

Answer 13

An individual might find that excessive levels of income could lead to the pension not lasting their lifetime; or that the level of annuity available in the future is low due to the pension not growing at or above the critical yield.

Question 14

Why might someone not want to take income from their pension?

Answer 14

They may prefer to leave their pension to their chosen beneficiaries on death

Question 15

Why might someone want to take high levels of income from their pension?

Answer 15

To repay debt, fund business ventures or pay for luxuries

Question 16

What are joint annuities?

Answer 16

These are usually set up so that the income continues on first death to benefit the surviving spouse; however, anyone can be added to an annuity at the outset, not just a spouse.

Question 17

What is the drawback to the annuity including an increasing income by a fixed percentage or linked to an index (eg, inflation)?

Answer 17

This is the most costly option.

The starting income of an index-linked annuity can be over 30% lower than a level annuity.

Question 18

Why are annuity options so important?

Answer 18

The options chosen at the outset by the annuitant have an impact on the level of starting income that an insurance company is prepared to offer in return for a lump sum.

Question 19

As well as the traditional annuities which are gilt-backed, what other type of annuities are available?

Answer 19

Investment annuities

Question 20

Where are Investment annuities more popular?

Answer 20

In countries like the US and Australia

Question 21

With-profits and unit-linked annuities allow an individual to purchase what?

Answer 21

A regular income and to benefit from any investment growth via receiving a higher level of annuity.

The returns from with-profits annuities are structured to give smoothed returns for investors.

Question 22

What do Short-term annuities offer?

Answer 22

A regular income for a specific term compared to a lifetime annuity which is paid until death.

Question 23

How can a Short-term annuity be funded?

Answer 23

An individual can use part of their drawdown pension fund to buy a short-term annuity contract from an insurance company of their choice

Question 24

What are the terms for a Short-term annuity?

Answer 24

A short-term annuity contract will pay them a fixed amount each year. The contract can last for up to five years and it does not have to come to an end when the person reaches age 75.

Question 25

What do Enhanced annuities offer?

Answer 25

Higher rates of annuity for those with particular medical conditions or lifestyles.

These include smokers, those suffering diabetes and the obese.

Question 26

Who are Enhanced annuities for?

Answer 26

Enhanced annuities offer an enhanced return for those who have a predicted shorter life expectancy; however, if health is very poor and life expectancy is very short, an individual might prefer not to purchase an annuity so they can leave their pension fund to chosen beneficiaries upon their death.