How To Get More From Your Pension
Getting the most from your pension should always be a priority. Your pensions, investments, and savings will no doubt need to last you for at least 20 years, and unless you have saved up a considerable pension fund you may find it does not stretch as far you would like. Working out how to get more from your pension will entail making smart decisions with the investments you have.
The Unsecured PensionIf you have a large pension fund of around £100,000 you may find that taking income drawdown or Unsecured Pension (USP) may be advantageous. A USP allows anyone until the age of 75 to take an income from their pension fund while the remaining money remains invested. As an alternative to purchasing an annuity there are some advantages to a USP.
As your pension fund will remain invested in the stock market there may be more growth potential. You will have greater control over your investments than you would if you left your decisions to your annuity manager. You can vary the actual income you withdraw within certain time limits to suit your needs, making USP a more flexible choice. You can also draw more income from USP than you could from an annuity making it a better choice if you wish to receive a greater income.
Phased RetirementAnother alternative to buying a straightforward annuity is to buy an annuity slowly over a number of years. With phased retirement you are investing in a personal pension fund that is divided into different parts. You can then take each part as a tax free lump sum of up to 25%. You can take the lump sums when you need them; you may need only a very few early on if you are still working part-time. The remaining fund must be used to purchase an annuity when you reach 75.
Phased retirement is more tax efficient as you can continue making pension contributions and receive tax relief if you are still working. Unlike an annuity the death benefits of phased retirement are greater, and you can leave your remaining fund to your chosen dependants without an imposed tax.
Investing a Lump SumMany people on retirement take a lump sum to spend on whatever they choose. This will of course decrease the amount of your pension income but this may be a wise decision. You can take the lump sum and invest it elsewhere, and as records have shown, investing in stock options usually pays a higher return that annuity rates. Unfortunately with investing in stocks there is no guarantee of return, so you may consider this a risky option.
However, pensions do restrict your choice of investments. For example you could decide to take your lump sum and invest it in a buy to let property with a higher monthly income. Or you could use the lump sum to pay off debts that are eating into your monthly income. If you decide to say no to the tax free lump sum then these options will not be available to you. The issue that is crucial with how to get more from your pension is to keep your capital working for you and generating income.
The Living Time PlanWhen you buy a living time plan from your pension fund you will receive an income for a minimum of five years, this must stop when you reach 75. When the living time plan matures you will receive a Guaranteed Maturity Amount (GMA) from which you will buy a retirement product such as a lifetime annuity. You can still receive a your lump sum but the living time plan allows you to stay clear of the investment risks while giving you a longer option before committing to an annuity.
The benefits of a living time plan is that you will know exactly how much your income will be and the amount of GMA you will receive, eliminating the risk that investing brings. Death benefits are greater as the plan does not die if you do; a spouse, partner or beneficiary can receive a lump sum or income from the plan. The income from a living time plan will only be slightly higher than that of an annuity but the GMA will usually be more. By delaying the purchase of an annuity there are potential financial rewards with a living time plan.
Your financial advisor should be the first point of call for detailed information on how to get the most from your pension. You may think that when you receive your pension your options and investments are limited and there is nothing more you can do. But your money can still work for you well into your retirement years by making sound financial choices.