Alexander Financial Services - Retirement

Open Market Option

An Open Market Option gives a pension policyholder the ability to choose from which insurance company they buy their annuity. The existing pension provider must advise its policyholder of this option before benefits are taken.

{1} Annuities

An annuity is an income, usually for life, which is bought from an insurance company, usually with the proceeds of a pension fund . The fund may be used to buy an annuity at any time between the age of 55 and 77, but certainly before age 77.

Annuity income may be paid either on a level basis or with a built in increase to take into account rises in the cost of living. Payments may be guaranteed for a certain period of time, ensuring a continuing income, during the guaranteed period, to the estate upon death.

Provision may also be made for a lesser income to be paid to spouse or dependants upon death. "Lifestyle2 or "impaired life" annuities may be offered to some people who have a reduced life expectancy due to ill health or habits such as smoking etc.

{2} Phased Retirement

Phased Retirement is a facility whereby the pension plan is divided into segments. As and when income is required, segments are 'encashed' to provide a combination of pension commencement lump sum (see below) and an annuity/or drawdown pension , thus providing an "income". This process is repeated, usually annually, when additional income is required. Future income will depend upon the investment performance of the residual fund and movements in annuity rates and total annual "income" could reduce. On the death of the plan holder any unencashed fund is usually available to the beneficiaries with no charge to tax. See drawdown sections below for death benefits on encashed segments.

{3} Capped Drawdown

Capped Drawdown enables maximum pension commencement lump sum to be taken at retirement but delays the purchase of an annuity. The residual fund remains invested and income is produced by the encashment of units in the underlying fund. The Government prescribes the maximum levels of income but the plan holder may vary the income between zero and the maximum. If income is taken at, or close to, the maximum permitted, there is a real possibility of the fund value being eroded. The limits are reviewed every three years to age 75 and annually thereafter, and may result in lower levels of income being available. The factors, which influence the levels at review, are the HMRC rates (set by the Government Actuary's Department), the fund value and the plan holder's age. The facility remains available until the planholder wishes to purchase an annuity. The fund is available to beneficiaries on the death of the plan holder by way of taxable income or as a lump sum that is subject to a tax charge.

{4} Pension Commencement Lump Sum (PCLS):

Typically up to 25% of the fund is usually available from a pension fund. PCLS is now also available from Free Standing Additional Voluntary Contributions and from plans relating to contracting out of the State Second Pension (Protected Rights).