Retirement: what are your income options?

20 Dec 2019

Andrew Bell

Financial Planning Director

Over the last several years there have been some significant changes to how people are able to retire in Great Britain. These new options each come with their own set of pros and cons. However, under the right circumstances, they could be worth understanding and looking into.

On the 6th April 2015, the then Chancellor of the Exchequer, George Osborne, introduced two new major flexibilities around how benefits could be drawn from registered pension schemes. The first new benefit option was christened “Flexi Access Drawdown” or FAD for short. FAD permits individuals, upon reaching the age of 55, to withdraw any amount they wish from their defined contribution pension scheme with no upper cap. Individuals have the flexibility to draw a tax-free lump sum (within limits which are normally 25% of the pension fund) and also draw a taxable income. It is also possible to take tax- free cash without drawing an income.
 
The second option was the snappily- titled “Uncrystallised Funds Pension Lump Sum” but is more commonly known as UFPLS. This involves drawing a lump sum from a pension, with 25% of the withdrawal being tax-free and the remainder taxable.
During the 2018/19 tax year, 646,530 pension plans were accessed for the first time in order to draw benefits according to a report by the Financial Conduct Authority
The changes have had a dramatic impact on the retirement income market in the UK. The latest Retirement Income Market report for 2018/19 produced by the Financial Conduct Authority shows that during the 2018/19 tax year, 646,530 pension plans were accessed for the first time in order to draw benefits. The method of access was broken down as follows:
 
  • Plans used to buy an annuity – 73,977 (11%)
  • Plans entering income drawdown and not fully withdrawn – 190,971 (30%)
  • Plans with the first UFPLS payment and not fully withdrawn – 26,738 (4%)
  • Plans fully withdrawn – 354,844 (55%)
Interestingly, the report shows that plans being fully withdrawn, accounted for the largest percentage of pension assets being accessed.
 
The report also shows that flexibilities introduced in 2015 accounted for over one third of all transactions where an individual accessed pension plan benefits for the first time, proving that they have been a popular innovation. This popularity is likely to be partly explained by the move away from cliff-edge retirement. Many people are now choosing to retire in a more gradual manner by reducing working and making up the shortfall in salary through withdrawals from their pensions.
 
Other individuals choose to access benefits flexibility to take advantage of tax planning opportunities.
 
The bank of mum and dad is often called upon with individuals releasing lump sums from their pension in order to assist in the purchase of homes for children and dependents.
 
Accessing pension benefits flexibilities can have many advantages, but they can also have an impact on an individual’s tax position, their ability to fund pensions in the future and most importantly, it may result in an individual running out of money in retirement.
 
Both UFPLS and FAD normally involve the ongoing investment of pension assets so it is important that a suitable investment strategy is developed to match an individual’s attitude to risk, objectives, horizon and likely pattern of future withdrawals.
 
It is for these reasons therefore that we encourage individuals to take professional and independent financial advice before deciding to withdraw funds flexibly from a registered pension scheme.
 
The government has made available a guidance service known as Pension Wise that is free to use. The website includes a significant amount of information relating to the various pension benefit options and can be accessed at www.pensionwise.gov.uk.
 
It is worth noting however that Pension Wise is simply a guidance service, and as such, it will not make a recommendation to an individual as to what course of action to take.
 
For individuals with significant pension assets or complex circumstances, it is likely that they will benefit from receiving independent and professional advice on their options. If you would like to find out more, then please contact your local office and ask to speak to the financial planning team.

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