Reader Question:
My final salary pension scene was closed in 2009, leaving me with an annual pension of £36k at age 60, increasing by 5% pa up to and after retirement. My company set up a new defined contribution scheme which is likely to be worth £400k at 60. Assuming I take 25% of this pot as a tax free lump sum, what would the maximum additional amount pa that I could withdraw, accepting that this would be taxable. My objective would be to deplete this pot ASAP. Thanks
My Response:
Hi
Well there are a number of options open to you
Buy an annuity with your pension pot
The amount of income you receive each year from an annuity is determined by the options of the annuity you purchase. Annuities can be taken out on a single life basis i.e. they stop paying income when you die and there is no death benefit for your spouse for example. Alternatively they can be set up to provide spouse’s income in the event of your death, provide a level of income for you or income that increases with inflation etc.
So you can see that the amount of income will vary, as you add more benefits your initial level of income will fall. But as a guide the highest income you are likely to receive is from a single life level income annuity.
For a man (non-smoker) of 60 wanting a level income and no guarantee, a pot of £300,000 (after you’ve taken your tax-free cash) will provide around £15,600 a year.
Here is a link to a annuity comparison tool which you can play with to work out your potential income should vary the annuity type.
Enhanced annuities / Impaired Life Annuities
It is possible for people with a perceived reduction in life expectancy to receive a higher annuity income in retirement. To put it bluntly, this reflects the fact that the annuity providers will in all likelihood only have to pay an income for a reduced period of time. These types of annuity of annuity fall into two categories:
- Impaired Life Annuities and
- Enhanced Annuities.
Both provide a higher annuity income than a standard annuity.
To quote the Pension Advisory website ‘’an impaired life annuity pays an income for life in the same way as a lifetime annuity. However, it pays a higher income to those suffering with certain medical conditions on the basis that they have a reduced life expectancy. Medical conditions include, but are not limited to, high blood pressure, diabetes, heart conditions, kidney failure, certain types of cancer, multiple sclerosis and chronic asthma. An annuity provider will normally ask for a report from your doctor. They do this to make sure that the details in your application form are correct’’ and that you are eligible for an impaired life annuity.
The Pension Advisory website defines an enhanced annuity as ‘’normally [being] available for regular smokers, but can also benefit people who are overweight. An enhanced annuity may also be available if you have spent a good proportion of your working life in a hazardous occupation, such as mining.’’
So if you fall into any of the ‘risk’ groups you should consider looking into taking out either an Impaired Life annuity or an Enhanced annuity when you retire.
It is possible to get ‘smokers only’ impaired annuity figures from the handy annuity comparison tool mentioned earlier.
Flexible Drawdown & Capped Drawdown
An alternative option to purchasing an annuity is to draw income via income drawdown. This allows you to take income from your pension fund while the fund remains invested and continues to benefit from any fund growth. Generally this approach is not suitable for those will pension puts under £100,000. Unfortunately this may not be available via your company scheme so you would be required to transfer your fund into a personal pension arrangement.
Under what is known as capped drawdown there are a number of rules surrounding the level of income that can be drawn this way which include a maximum amount as well as regular reviews. The calculations of the maximum income are complex but here is a handy drawdown calculator which does the job for you. But to give you a guide a man of 60 can draw a maximum of £14,400 a year initially, subject to ongoing review.
But for some people there is now an option known as flexible drawdown. Under flexible drawdown you can withdraw as little or as much income from your pension fund, as you choose, as and when you need it. The main constraint is that you have to declare that you are already receiving a secure pension income of at least £20,000 a year and have finished saving into pensions. This would likely include you.
Word of Warning
I would strongly suggest that you employ the services of an Independent Financial Advisor before doing anything. This is an important decision and there can be irreversible implications. Basing a decision purely on income levels may not be in your best interest. For example a single life annuity income is secure but you lose all the capital in the event of your death. Income drawdown allows you to remain in the investment market (which may not be a good thing) and vary your income, as well as pass on some of your pension pot to your dependants if you die. But you could dwindle away your pension pot and be hit by adverse market movements etc which could leave you high and dry in retirement. Bear in mind the figures quotes are only indicative and will almost certainly change by the time you are actually 60.
I hope that helps
Best Wishes
Damien
Money to the Masses
Website: www.moneytothemasses.com
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