For those who want to keep a closer eye on their pension pots when they retire, new rules that came into effect on A-Day (April 6) may offer just the opportunity.
No longer will you be forced to use the retirement funds from your company pension to purchase an annuity, which although giving you a steady income for the remainder of your life, required you to kiss goodbye to your pension assets.
Instead, you will now be able to sign up for a new “unsecured pension”, making it much easier to draw an income directly from your pension scheme without having to buy an annuity. These more flexible rules will allow you to withdraw up to 25 per cent of your pension as a tax-free lump as early as your 50th birthday and take out additional funds in the years that follow.
Under the new regime, if you are aged 50 or over you will be able to take your entire tax-free cash entitlement from your company pension, including from any Additional Voluntary Contributions or AVCs, employer top-up schemes, regardless of whether or not you are retired.
In addition, under the unsecured pension rules, right up until age 75 you have the option to take a taxable income – equal to as much as 120 per cent of the annual income payable from an annuity with a competitive rate. Government actuaries review this rate every five years.
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If you don’t want to draw this income each year, you don’t have to. However, you can only leave your pension money in such an unsecured pension arrangement until your 75th birthday.
Thereafter, if you want to continue to draw down funds and not buy an annuity, you have to switch to a scheme called “an alternatively secured pension” or ASP. These only permit you to withdraw a taxable income equal up to 70 per cent of annuity rates.
Unsecured pensions could offer a cornucopia of benefits. In theory, if your fund performs well you may be able to generate more income than from conventional annuities. Falling yields on gilts – government securities that underpin the income promises of annuities – have had an affect on annuity rates and, for investors comfortable with greater risk, other investments could produce better returns in the long run.
The main benefits of unsecured pensions and ASPs are that you don’t have to convert capital into income as you would with an annuity, which gives you flexibility. You have more control over your investments and on your death and also your family could get their hands on the money more easily.
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