Choosing how to take your pension benefits is a crucial decision. If none of the current options quite fit the bill, here's a tempting alternative.
Deciding how to take your retirement benefits can sometimes feel like being caught between a rock and a hard place.
Perhaps you don't feel comfortable with the investment risk of income drawdown where you withdraw money from your pension fund as income for a period of years prior to buying an annuity.
Or maybe the declining, albeit guaranteed income, generated by a lifetime annuity doesn't really appeal to you either. If this sums up your dilemma, is there a better solution?
Ok, I wouldn't ask the question unless I had an answer in mind! Today I want to write about a new plan which has recently come to my attention that may interest you if you feel like your options have already run out.
The Living Time Plan
The Living Time Plan could be described as bridging the gap between income drawdown (now known as Unsecured Pension, USP) and lifetime annuities. Here's how it works: the pension fund you've built up throughout your working life is used to buy a Living Time Plan which provides you with an income for at least five years, but must stop by the time you reach 75. You can still take 25% of your fund as tax-free cash and move the balance into the plan.
Put simply, when the plan matures you'll receive a Guaranteed Maturity Amount (GMA). The GMA must then be used to buy a new retirement product which is suitable for you at that time such as a lifetime annuity or an Alternatively Secured Pension (ASP - basically income drawdown beyond the age of 75).
The plan allows you to keep your options open for longer by avoiding an immediate, lifelong commitment to an annuity, while steering clear of the investment risk which is inherent in USP. Here are a few more key benefits:
- You'll know upfront how much income you'll receive and the GMA on maturity so there's no investment risk.
- The income you receive is guaranteed but it must fall between nil and the maximum allowed by legislation which is 120% of the income from an equivalent annuity.
- If you die during the term, your plan won't die with you. You can elect for your spouse/civil partner to receive an income or lump sum if he/she survives you. Or it may be possible to nominate a beneficiary to receive a lump sum.
- Crucially, you may be able to benefit from a potentially higher income in the future if your health has deteriorated during the term on the plan.
- The plan is underwritten by AIG, one of the world's largest insurers.
The illustration below should give you an idea of the benefits the Living Time Income plan could provide:
Pension Fund Value | Tax-Free Cash @ 25% | Balance | Annual Income For Five Years | GMA Returned On Maturity | Equivalent Annuity Income |
|---|---|---|---|---|---|
£133,333 | £33,333 | £100,000 | £6,158.88 | £91,644.46 | £6,153.24 |
As you can see, the Living Time plan only generates a marginally higher income than an equivalent annuity. But more interestingly, in this example, the total income withdrawn over the five year term is £30,794 but a GMA of more than 91% of the original fund is preserved.
The plan might look as if it's doing nothing more than delaying the inevitable moment when you'll effectively be forced into buying an annuity. But this delay could potentially reap huge rewards. We all know life expectancy is improving but it's an entirely different picture for healthy life expectancy.
According to the Office for National Statistics (ONS) in 2001 healthy life expectancy at birth was 67 years for males and 68.8 years for females. If you by an annuity at normal retirement date (NRD) i.e. 65 years, the chances are you'll still be healthy and therefore only qualify for standard annuity rates.
But a five year delay to 70 years means many more of us will have suffered health problems. This means you could qualify for an enhanced/impaired life annuity. Naturally if you're in poor health your life expectancy is reduced and therefore it's likely an annuity will only be required to pay out an income over a shorter period.
Because you're then less of a risk to an annuity company, in recognition they may pay higher annuity rates. In some cases the difference between standard and enhanced annuity rates can be as high as 40%. This could provide far better value than the lower rates often paid at NRD by standard annuities (Note there are several companies which specialise in providing enhanced and impaired life annuities.)
But as with all things there's a downside too:
Warnings
- The GMA you receive on maturity will be determined by the amount of income you have selected and any death benefits. The more income you take, the lower your GMA will be.
- It isn't possible to take your GMA as cash. You must use it to buy a lifetime annuity or ASP by 75 as required by government legislation.
- Most importantly, if you purchase an annuity after the plan has matured, the amount of income you receive will depend on annuity rates at that time. Consider this carefully; if rates decline over the term of your plan then the income you receive could be less than if you had selected an annuity at outset and you could be worse off.
Bear in mind the plan isn't really suitable for those of you who would like a guaranteed, fixed income for the rest of your life without needing to make further decisions. Lastly, it's worth pointing out the plan is only available through financial advisers but I think this is no bad thing. Getting the decision right is crucial and discussing it with a professional first is a sensible move.
More: Increase Your Pension By £1,000 | How To Double Your Pension.