Pension Page

Annuity vs Drawdown

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Ensure your retirement strategy meets your needs and goals

Pension annuities

Benefits Risks
Provides guaranteed income for life and cannot be affected by market fluctuations. If you pass away shortly after taking one, you won’t benefit from the full value you paid upfront.
Some policies guarantee indexation meaning the pension will rise with inflation over time. Rates tend to be lower when interest rates fall, so you may get less than you had hoped for when taking your pension.

Pension Drawdown

Benefits Risks
Offers more flexibility and money can be taken when it is needed. Markets can potentially be volatile and there may be no guaranteed income from investments.
Any money left in the drawdown pot will not be liable for Inheritance Tax. If too much is taken out of your drawdown pot, then you could face hefty tax bills.

Retirement planning services

It’s important that professional advice is taken before deciding upon a retirement strategy. The right strategy should be tailored to the individual’s needs and circumstances.

What is pension drawdown?

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Financial Planner, Amy Burge, explains what Pension Drawdown is, what pension planning services we offer and how she has helped a client with their pension planning.

Pension drawdown or annuity?

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Make sure your retirement strategy meets your needs and goals.

It’s important to make a well-informed decision when it comes to deciding what to do with your pension pot: drawdown, annuity, or a combination of both. Making the right choice will affect your retirement for many years.

Pension drawdown gives you freedom and flexibility, allowing you to choose your annual income, whereas annuities provide steady income and security. For those who want both, they can purchase an annuity with part of their pension whilst keeping the rest in a drawdown agreement – giving them the best of both worlds.

The decision of whether to use drawdown or annuities can be a complex one, and professional advice is essential. Depending on your circumstances, either option may be suitable, with some preferring the security of knowing their income will remain stable for life, while others find the greater flexibility of drawdown more conducive to their retirement plans.

Flexible access pension (drawdown)

Pension drawdown can provide more flexibility and control over how your money is managed in retirement. Drawdown is an increasingly popular option for retirees to receive an income during their retirement. This method of taking an income allows individuals to access their pension fund in a tax-efficient way, as withdrawals are only taxable when they exceed the Personal Allowance.

The main advantage of pension drawdown for retirees is that it offers more flexibility than other options such as annuities or lump sum payments. Retirees can take out whatever amount they require, when they need it, and don’t have to commit to fixed payments over time, allowing them the freedom to make their own decisions on how they wish to use their pension savings.

Another benefit is that any money left in the drawdown pot will not be liable for Inheritance Tax. This is beneficial for those who wish to leave a legacy for their beneficiaries, as the remaining investment can pass directly to them without being taxed.

On the other hand, choosing drawdown does come with some risks. Retirees should consider that markets can potentially be volatile and there may be no guaranteed income from investments. Withdrawing too much capital can also leave you exposed should you live longer than anticipated. It’s important that individuals understand how they plan to invest their pension savings and how any losses or gains might affect them in future years. Additionally, if retirees take too much out of their drawdown pot, then they could face hefty tax bills.

Overall, it’s important that professional advice is taken before deciding upon a retirement strategy. While drawdown can offer more flexibility than other options, it’s important to weigh up all the pros and cons before deciding. Ultimately, the right strategy should be tailored to the individual’s needs and circumstances.

Pension Annuities

In contrast to drawdown, pension annuities provide a guaranteed lifetime income, but they also carry risk; if you die shortly after taking out an annuity it means that you won’t benefit from the full value that you paid for upfront. This can make them unsuitable for those with shorter life expectancies compared to those who are expected to live longer. The current rates available on annuities may be attractive when compared to those in the recent past, and this can be an incentive for those previously deterred by low returns.

The benefits of an annuity include long-term security, since the income is guaranteed for life and cannot be affected by fluctuations in investment returns or other market factors. Plus, some policies guarantee indexation which means that the pension will rise with inflation over time. This helps to ensure that retirees have sufficient funds to maintain their lifestyle going forward.

However, there are also downsides to consider when deciding whether an annuity is right for you. Annuity rates tend to be lower when interest rates fall, so you may get less than you had hoped for when taking your pension. Plus, the income is fixed and cannot be adjusted, so if your circumstances change in retirement and you require more funds it may not be possible to increase the amount you are receiving.

Ultimately, professional advice should always be sought with an annuity purchase as there can be a number of factors that need to be taken into consideration before making a decision. It is important to fully understand the terms of the policy and make sure that it is suitable for your individual situation before committing to anything long-term.

Combination of drawdown and annuities

For some people, a combination of pension drawdown and annuities may provide the best balance between security of income and control over withdrawals – we can help to determine which option is most suitable for you. Ultimately, it’s important to understand all aspects of both drawdown and annuities, including the pros and cons of each, before deciding.

Making sound financial decisions requires due diligence and considering all relevant factors so that your retirement goals are met in the most efficient way possible. Therefore, it is important to consider both drawdown and annuities when planning for retirement, and professional advice is key to making an informed decision. With the right knowledge and professional advice, you will be able to decide as to which option is most suitable for your circumstances.

By considering all relevant factors, you can make sure your retirement strategy meets your needs and goals.

Our retirement planning services

As we all live longer and enjoy unprecedented freedom to decide our own retirement options, it has never been more important to have clarity over what you want to do and how much money you’ll need to achieve that.

Through our retirement planning services, we can help you position your finances so that you are confident of maintaining a good standard of living and have the income to realise your life goals, whatever they may be. For more information, please contact us.

Spring Budget Pensions

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2023 Spring Budget on Pensions

Jeremy Hunt delivered his first budget as Chancellor of the Exchequer on 15th March and announced the following changes to pension legislation. 

Pension Lifetime Allowance

The Lifetime Allowance charge will be removed from April 2023 before it is abolished entirely from April 2024.

Pension Annual Allowance

The Annual Allowance will be raised to £60,000.

Spring Budget 2023

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How will the Spring Budget impact pensions?

Jeremy Hunt delivered his first budget as Chancellor of the Exchequer on 15th March, announcing key changes to pension legislation for the 2023/24 tax year.

Changes to Pension Lifetime Allowance

The headline measure was the change Pension Lifetime Allowance. Currently, the Lifetime Allowance stands at £1.0731m, this is the total amount of pension savings you can build up without incurring a tax charge over your lifetime.

If you exceed this figure, tax is charged at 25% if this excess is drawn as income, and 55% if this is taken as a lump sum.  

From 6th April 2023 the Pension Lifetime Allowance charge will be reduced to 0%, with the government intending to potentially scrap this Lifetime Allowance altogether. This will dramatically simplify pension savings for many people with assets close to the Lifetime Allowance amount.  

As part of these changes the maximum tax-free cash lump sum individuals can continue to draw will be a quarter of the current Lifetime Allowance, which equates to £268,275.  

Changes to Annual Allowances

The Chancellor has also announced key changes to the Pension Annual Allowance. The Annual Allowance currently stands at £40,000 or 100% of earnings. This allowance is to be increased to £60,000 or 100% of earnings, whichever id the greater.  

Whilst this will not affect the majority of the UK tax paying population, it does impact high earners and those who are more able to contribute larger sums into their pension savings. Increasing the Pension Annual Allowance is a move by the government towards simplifying pensions, making them appealing and attractive to the working population and is hoping to entice higher earners back to work or to stay in employment longer.  

Along with the Pension Annual Allowance, the Chancellor has also increased the Money Purchase Annual Allowance which currently stands at £4000 to £10,000. The Money Purchase Annual Allowance is generally triggered for those who have accessed their pensions flexibly, and their Annual Allowance is reduced from £40,000 to £4,000. From the 6th April 2023 this will increase to £10,000 per year.  

These significant changes made by the Chancellor in the Spring Budget have come under immediate scrutiny from opposition parties and already there have been rumours circulating that potential new Governments could well reverse these changes.

However, it is important to plan your finances based on current legislation and not hold off on making important financial decisions.

Your Ellis Bates Financial Adviser can guide you through any impact the Spring Budget may have had on your pension. If you are not currently an Ellis Bates client and are looking to review your pension in light of the Spring Budget, please do get in contact with us for an initial discussion on your particular circumstances. 

Pension Myths

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Pension myths vs facts: Can your pension provide the lifestyle you want?

We have the answers to some of the myths around pensions so that you can maximise your retirement. To find out more about our pension planning services and our retirement planning services, please get in touch.

Our pension planning services

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Head of pensions, Nigel Swan, outlines our pension planning services at Ellis Bates Financial Advisers.

Busting the myths about pensions

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If you are approaching retirement age, it’s important to know your pension is going to finance your future plans and provide the lifestyle you want once you stop working. Pension legislation is extremely complex and it’s not realistic to expect everyone to understand it completely. But, since we all hope to retire one day, it is important to get to grips with some of the basics.

Many of us have made pension provision, but some of us don’t know very much about the details. To help you get a handle on some of the myths around pensions, we’ve got answers to some of the things you may have been wondering about. It’s particularly helpful to become aware of the things you may have thought were facts that are actually myths. Here are some examples.

Myth: The government pays your pension

Fact: The government pays most UK adults over the pension age a State Pension, which is currently:

  • Retired post-April 2016 full rate State Pension of £185.15 a week
  • Retired pre-April 2016 full rate basic State Pension of £141.85 a week (a top-up is available for some, called the Additional State Pension)Not everyone is eligible for the full amount, which requires you to have at least 35 qualifying years on your National Insurance record. If you have less than ten qualifying years on your record, you’ll receive nothing. Even if you receive the full amount, you’ll usually need to supplement it with your own pension savings.

Myth: Your employer pays your pension

Fact: Most people are automatically enrolled into a workplace pension. Your employer is usually required to pay a minimum of 3% of your salary into it and you must also pay a minimum of 5% of your salary. If you keep your contributions at the minimum level, it might be difficult to save enough for retirement.

As life expectancies grow longer, your retirement can be almost as long as your working life. It’s therefore important to put aside a portion of your earnings to create a pension pot that will enable you to receive the income and live the lifestyle you want during retirement.

Myth: You can’t save more than your lifetime allowance

Fact: There is a lifetime allowance on the benefits you can access from your pension, which is currently £1,073,100 (tax year 2022/23). That doesn’t mean that you can’t withdraw any more after that, but it does mean that you’ll pay a tax charge of up to 55%. However, it was announced in the Spring Budget 2023 that this will be abolished from April 2023.

Myth: Your pension provider’s default fund is suitable for everyone

Fact: Most pension default funds will start out with a high-risk strategy and steadily move your capital into lower-risk investments, such as bonds and cash, as you get closer to retirement. This is to reduce volatility in the value of your investments so that you can have a higher degree of confidence in how much you’ll eventually end up with.

If you don’t plan to purchase an annuity, you don’t necessarily need to reduce volatility before retirement. You may be leaving some of your money invested for several more decades, in which case a higher risk strategy may be more appropriate.

Myth: Annuities are outdated

Fact: There was a time when almost everyone bought an annuity when they retired, and that time has passed because there are now alternative ways to access your pension savings. But annuities still have a useful role for generating a retirement income and can be an appropriate product for some people. Unlike other pension withdrawal methods, such as drawdown, an annuity offers a fixed income for life, so there’s no risk of your money running out. That’s a crucial benefit for many pensioners.

Myth: You can’t pass on a pension

Fact: If you’ve used your pension savings to purchase an annuity, the income from this will usually cease when you die. But if you have pension savings that you haven’t used to buy an annuity (for example, if you’ve been taking an income through drawdown), what’s left can be passed on to a loved one. If you die before the age of 75 there will usually be no tax to pay by the beneficiary. Otherwise, they will need to pay Income Tax according to their tax band.

Get in touch

If you would like more information on our pension planning services or are looking for financial advice, then please book a chat.

Taxing Times

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Time for a tax health check?

With the current tax year having begun on 6 April 2022, the clock is ticking and it is important to utilise all the tax reliefs and allowances available to you before 5 April 2023 in order to minimise any potential liabilities.

Personal tax planning should be at the top of your agenda as the end of the current tax year is not too far away. Taking action now may give you the opportunity to take advantage of any remaining reliefs, allowances and exemptions.

At the same time, you should be considering whether there are any planning opportunities that you need to consider either for this tax year or for your long-term future. We’ve listed a few reminders of the issues you may want to consider as worthy of including in your 2022/23 tax health check to-do list.

Some key things you might need to action before the tax year end

1. Personal reliefs

Married couples should consider utilising each person’s personal reliefs, as well as their starting and basic rate tax bands. Could you make gifts of income-producing assets (which must be outright and unconditional) to distribute income more evenly between you both?

2. Salary sacrifice

This is an especially tax-efficient way for you to make pension contributions, to save and reduce your Income Tax and National Insurance.
Have you considered exchanging part of your salary for payments into an approved share scheme or additional pension contributions?

3. Pensions annual allowance

Unless you are an additional rate taxpayer or have already accessed pension benefits then you are entitled to make up to £40,000 of pension contributions per tax year. Have you fully utilised your tax-efficient contributions for this tax year or any unused allowances from the three previous tax years?

4. Stakeholder pensions

A stakeholder pension is available to any United Kingdom resident under the age of 75. Children can also make annual net contributions of £2,880 per year, making the gross amount £3,600 regardless of any earnings. It is also a very beneficial way of giving children or grandchildren a helping hand for the future. Is this an option you or a family member should be utilising?

5. Large pension funds

The Pension Lifetime Allowance (LTA) is currently £1,073,100 and has been frozen at this level until the 2025/26 tax year. The maximum you can pay in is £40,000 per annum unless you pay tax at 45% in which case the annual limit could be as low as £4,000. Inflationary increases by the end of the current tax year could also have an impact on your pension funds. Do you have a plan in place to protect your money from this?

6. Pension drawdown

If your are 55 or over you could access 25% tax-free cash from your Defined Contribution (also known as Money Purchase) pension pots and invest the rest. However, drawing large amounts in one tax year can lead to a larger tax bill than if spread over a longer period. Do you know the implications of taking money out of your pension pots?

7. Passing on your pension

Usually called a ‘spousal by-pass trust’, although the recipient may not always be a spouse, this is a discretionary trust set up by the pension scheme member or pension holder to receive pension death benefits. Are your pension death benefits written in trust?

8. Individual Savings Accounts (ISAs)

An ISA allows you to save and invest tax-efficiently into a cash savings or investment account. The proceeds are shielded from Income Tax,
tax on dividends and Capital Gains Tax. The government puts a cap on how much you can put into your ISA or ISAs in any tax year (from 6 April to 5 April). The ISA allowance for 2022/23 is set at £20,000. Have you fully utilised the maximum annual allowance?

9. Junior ISAs

This is a long-term tax-efficient savings account set up by a parent or guardian, specifically for the child’s future. Only the child can access the money, and only once they turn 18. Have you invested the maximum £9,000 allowance for your child or children?

10. Lifetime ISAs (LISAs)

The Lifetime ISA (LISA) is a tax-efficient savings or investments account designed to help those aged 18 to 39 at the time of opening to buy their first home or save for retirement. The government will provide a 25% bonus on the money invested, up to a maximum of £1,000 per year. You can save up to £4,000 a year, and can continue to pay into it until you reach age 50. Could you be taking advantage of this very tax-efficient option?

11. Capital Gains Tax (CGT)

There are two different rates of CGT – one for property and one for other assets. If your assets are owned jointly with another person, you could use both of your allowances, which can effectively double the amount you can make before CGT is payable. If you are married or in a registered civil partnership, you are free to transfer assets to each other without any CGT being charged. It is currently £12,300 but will be reduced to £6,000 from 6 April 2023 and £3,000 from 6 April 2024. Have you fully used your current £12,300 annual exemption?

12. Inheritance Tax (IHT) relief

IHT must be paid on the value of any estate above £325,000, or up to £1 million for married couples including the residence nil-rate band). However, certain business assets, including some types of shares and farmland, in private trading companies can qualify for 100% relief from IHT. The government has frozen the IHT thresholds for two more years to April 2028. Are you taking advantage of the reliefs available to you?

13. Residence nil-rate band (RNRB)

This allowance was introduced during the 2017/18 tax year and is available when a main residence is passed on death to a direct descendant. The allowance is currently £175,000. When combined with the nil-rate band of £325,000, this provides a total IHT exemption of £500,000 per person, or £1 million per married couple. If you are planning to give away your home to your children or grandchildren (including adopted, foster and stepchildren) the RNRB must be claimed. There is a form for this purpose – IHT435. The form is available on the Gov.uk website. If applicable, have you applied for the RNRB?

14. Charitable and personal gifts

If you leave at least 10% of your net estate to charity a reduced inheritance rate of 36% applies rather than the usual 40%. Other exemptions apply for inter-spousal transfers, transfers of unused annual income, business and agricultural assets, and for various other fixed, small amounts. Are you intending to make gifts before the end of the current tax year?

15. Trust funds

These help protect your assets and guarantee that your loved ones have financial stability for their future. Crucially, a trust can help to avoid IHT and ensure that the majority of your money, shares and equity are passed on in the most efficient way. Should you consider setting up a trust? Future legislation could potentially result in changes to tax law, which could in turn require adjustments to your plans.

Want to talk about a tax health check?

We hope you find this checklist useful, but please bear in mind that this only provides a summary of the options available and not all options will be suitable for everyone. Therefore, for more information in respect of the ideas outlined, please contact us.

A pension is a long-term investment not normally accessible until age 55 (57 from April 2028 unless plan has a protected pension age). The value of your investments (and any income from them) can go down as well as up which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The value of your investments can go down as well as up and you may get back less than you invested. The financial conduct authority does not regulate taxation and trust advice. Trusts are a highly complex area of financial planning.