Most commonly asked pension questions

Published on 13 August 2018

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I have heard about options for keeping my pension benefits flexible. How would this work?

The traditional method of drawing pension benefits is by-way-of annuity purchase which means that you give up your capital sum for a guarantee of an annual income for the rest of your life. With the advent of income drawdown and the latest version known as Flexi-access drawdown (FAD), you can retain your capital sum and instead invest this to achieve an investment return. A regular income can be paid from these monies and providing the investment return is sufficient, the pension pot can be maintained or even increased. This option allows flexibility over the level of income paid with potential for any residue monies to be available on death.

I want to retire but I am worried about having enough guaranteed income to meet my needs. How can I ensure that my basic requirements are met whilst keeping the potential to pass any residue pension monies on to my children.

Whilst annuity purchase is generally inflexible, it can be a very good basis for meeting individual’s minimum income requirements. We all have “must-pay” expenditure and the thought of not having sufficient monies to meet this need can be worrying. With the advent of flexibility in retirement, a combination of annuity purchase and Flexi-access drawdown (FAD) can provide a guarantee of sufficient income for necessities whilst keeping the remainder of the pension pot liquid. These liquid monies can then potentially be available for passing on to beneficiaries on death.

What happens to my pension values when I die? I wouldn’t want these to die with me especially as I have paid in for all these years.

This is a very common question and appeals to our sense of fairness in saving the pension monies in the first place. You will be pleased to know that death before retirement allows for the lump sum to be paid to beneficiaries of your choice. Death after drawing benefits depends on the method that is used for payment of income. If annuity purchase is selected then there can be guarantees that income is paid for a certain number of years but this will eventually expire and no further value is then available.

Alternatively, if Flexi-access drawdown is chosen then the remaining pension pot is available to pass on to beneficiaries either as a lump sum or as a pension pot that they can draw down themselves. One thing to note is that the age of the pension owner determines whether the monies are tax free or not to the beneficiaries. Under age 75 the pot is tax free, 75 and over then the pot is taxable, when drawn, at the beneficiary’s marginal tax rate. In either case, there is no Inheritance Tax which makes pensions a very good mitigator of this tax.

Please be aware that the above answers are meant as an indication of the options available to individuals. These should not be relied upon in respect of an individuals situation and you should always seek independent financial advice from an authorised Independent Financial Adviser (IFA) before making a decision.

If you would like to discuss your pension options in preparation for and in retirement, please contact Tim Maakestad here.

Our Wealth Management team can help you and your family manage your wealth throughout your life time, from the early years through to preserving and distributing your assets and wealth for the next generation. To read more about our combined Wealth management offering and find out how we could help you, please click here.

This material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation. Kreston Reeves Financial Planning Limited (Registered in England and Wales, registered office: 37 St Margaret’s Street, Canterbury CT1 2TU, number 3852054) are authorised and regulated by the Financial Conduct Authority.

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