What are your retirement options? – occupational scheme (defined contribution)
If you are approaching retirement and you are a member of defined contribution occupational scheme it's important that you understand the retirement options available. I have detailed these options below to enable you to make the right choices when it's time to put your feet up.
What is a defined contribution occupational scheme?
This is a pension scheme, set up by your employer, where the benefits you receive are dictated by the level of contribution made by both yourself and employer plus any investment growth. You should have received regular updates of your pension performance from the pension provider used by your employer.
Will I get a final update of my pension performance prior to retirement?
Your pensioner scheme provider should send you, no later than 6 months before you are due to retire, details of your total fund together with the pension choices you have.
What are my pension choices?
- take an income by purchasing an annuity (which will provide an income for life) from your pension scheme provider
- take a cash lump sum (up to 25% of fund value) and use the balance to purchase an annuity from your scheme provider
- take advantage of the Open Market Option which allows you to shop around for the best annuity available across all annuity providers. You will still be able to choose between a full annuity or a cash lump sum and a reduced annuity
- If you are at least 60 you may be able to take all your pension as a lump sum. You can only do this if the total value of all your savings in all pension schemes is less than £18,000, you usually pay tax on part of this lump sum
- If your fund value is less than £2,000 then you can take it as a cash lump sum, if your scheme rules allow, even if all your pension savings exceed £18,000, youou usually pay tax on part of this lump sum
- Many schemes offer the option of 'income drawdown' which allows you to take an income whilst leaving your pension pot invested. There are rules governing the level of income that can be taken, and your future income could go down as well as up depending on investment performance
Are there different types of annuity?
There are 2 basic types of annuity
- Single Life - this pays you an income for the rest of your life
- Joint Life - this pays you an income for the rest of your life, then after you die will be paid to your wife, husband or partner, until they die
Both basic types of annuity have additional options available
- Level - the pension income remains the same throughout your life
- Escalating - the pension income you receive increases each year, either in line with inflation (RPI or CPI) or a chosen increase, typically 3% or 5%
- Guarantee period - the pension will be paid for a minimum period, typically 5 or 10 years. This means that if you die your pension will continue to be paid to your wife, husband, partner or estate, for the remainder of the guarantee period
- Investment-linked - the pension income is linked to stock-market performance and as result could go down as well as up
- Impaired life - if you are suffering from an illness that could reduce your life expectancy then a much higher pension can be obtained
- Enhanced life - if you are overweight, smoke or have other lifestyle issues then a higher pension could be obtained
Where can I obtain quotes for alternative pensions using the Open Market Option?
The government backed Money Advice Service has a good online search tool, just complete a simple form and it will provide you with a list of quotes from alternative providers.
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