GUIDE TO YOUR RETIREMENT · 2015. 4. 7. · Step By Step Guide If you don’t know how much you are likely to get from these pension arrangements then you can contact your employer

GUIDE TO YOUR

RETIREMENT

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IN THIS GUIDE WE SET OUT: Page

Section 1: step by step guide

Deciding how to use your pension pot 6

Section 2: your choices explained

The main pros and cons of each choice including how much tax you will pay and what will happen when you die 12

Option 1: Taking all your pension pot as a single lump sum 12

Option 2: Taking a guaranteed income for the rest of your life 14

Option 3: Taking part of your pension pot and leaving the rest invested to take at a later date 19

Option 4: Taking your pension pot at a later date 21

Summary: Main features of your choices 22

What happens to your pension pot if you die 23

Your pension choices and tax 24

Case studies: These show how much tax you might pay under the different options 25

Section 3: our products and services explained

The products and services we can offer you, and where you might want to look elsewhere 31

Note: This guide and the information in it about retirement choices only applies to pensions that are classified by the Government as ‘Defined Contribution’ or ‘Money Purchase’ Pensions, where the pension you receive is related to the contributions you make. This will include most personal pensions and stakeholder pensions, including those arranged through your employer, but will not include ‘Defined Benefit’ pensions (for example where the pension you receive is determined by your salary).

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A GUIDE TO YOUR RETIREMENT

The decision about what to do with your pension pot is a very personal one. You now have more choice and freedom than ever before in what you can do with the pension pot you have saved with us.

It’s important that you think about your options carefully, so you can make the right choice for your individual circumstances.

Your choices are:

Your pension pot

Convert your pension pot into

a guaranteed income for the rest of your life

Take some of your pension pot now and leave the rest invested for

another time

You can take a series of lump sum payments

or income at different times or

a mix of both

Leave your pension pot

invested and take it at a later date

Take all your pension pot as a single lump sum

25% is tax-freeWith both of these options you can take up to 25% of your pension pot

as tax-free cash

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To help you understand your options and make the right choices, the Government is making available a free and impartial guidance service to people, such as yourself, who are considering what to do with their pension pot. We strongly recommend that you use this service.

The service will:

• Discuss your retirement options and provide key facts and information on each of these outcomes (e.g. tax)

• Outline the potential issues you will need to consider including life expectancy, income and possible long-term care needs

• Provide you with a record of the session and outline your next steps. This should include key facts, potential issues you need to consider, any information or advice you will need and further details on how to shop around.

This guidance can be accessed in a variety of methods to suit your needs.

• Online, the service is available by accessing gov.uk/pensionwise

• Over the phone. This service is provided by the Pensions Advisory Service.

• Face to face, please contact your local Citizens Advice Bureau to arrange a meeting.

The Guidance Service will not provide advice or recommend specific products or providers. If you feel you need advice we would recommend that you talk to a financial adviser. If you are not sure or do not understand information provided by the Guidance Service, we recommend you speak to a financial adviser. The enclosed Money Advice Service guide includes details of how to find a financial adviser in your local area. Advisers may charge for providing advice and should confirm any cost to you beforehand.

Before you use the service:

• Gather information about your pension and other sources of income.

• Check whether any of your pension policies have Guaranteed Annuity Rates, other guarantees, or any restrictions or charges such as Market Value Reductions (these should normally be set out in your retirement documents).

If you had a pension but no longer have the details you can try and find your pension through the Government’s Pension Tracing Service. They can be contacted online at gov.uk/find-lost-pension or by telephone on 0845 6002 537.

PENSION WISE: THE GOVERNMENT’S GUIDANCE SERVICE

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SECTION 1

STEP BY STEP GUIDE

TimescalesYou need to allow yourself plenty of time to consider the options available to you. You may need to take further action, such as getting quotes from other providers, getting advice and then converting your pension pot to another product or moving it to another provider. This takes time, so you need to ensure you start as early as possible to make sure you are able to take your benefits when you want to.

1. Are you ready to take your pension pot now?

The first thing to consider is whether to take your pension pot now, or to wait a while.

Why might you want to wait?

• You are still working or have other pensions or income which means you don’t need the money right now

• To give your pension pot more time to grow and to see if you can get a higher income

2. How much money will you have to live on?

Are you retiring completely, or do you intend to carry on working in some capacity?

• If you do intend to carry on working, what income will you receive from this?

• What income will you receive from other pension pots? You may have products with other providers and income such as:

State Pension Currently, the basic state pension pays a maximum of £115.25 per week (tax year 2015/16). The Additional State Pension and Pension Credit may also be available. For people reaching state pension age after 06/04/2016 the new single-tier State Pension will apply. You cannot access the State Pension before your state pension age so you will need to know this too.

Workplace pensions You normally pay a percentage of your salary and this is automatically deducted from your wage each pay day. Your employer may also pay into the pension scheme for you.

There are two main types of workplace pension:

• Defined Benefit (DB) where the amount of income you receive from your pension is linked to your salary, and

• Money Purchase (MP) where you and your employer’s contributions are used to build up a pot of money. e.g. a Group Personal Pension or employer sponsored stakeholder pension scheme. You can normally choose how and when you want to use that pot.

Private pensions You will have arranged this yourself with a pension provider (or you may have used the services of a financial adviser to help you).

These are normally Personal Pensions or Stakeholder Pensions that you have set up yourself with a pension provider. Your contributions are used to build up a pot of money and you choose how and when you want to use that pot.

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If you don’t know how much you are likely to get from these pension arrangements then you can contact your employer or provider to find out.

You can find out your state pension age on the Government’s website gov.uk/calculate-state-pension and you can get a quote for your state pension on gov.uk/state-pension-statement.

Important Reminder

Guaranteed Annuity Rates or other guaranteesYour retirement documents will normally tell you if your pension has a Guaranteed Annuity Rate or other guarantees, but if you are in doubt you should check with your pension provider(s). These guarantees will often provide you with an income for life much higher than you might normally get. If you decide to move your pension pot elsewhere or use it other than to take an income you may lose these valuable guarantees.

What other sources of income or savings will you have?

Your savings could include:

• Cash, such as bank or building society deposit accounts

• ISAs

• Stocks and shares

• Other savings or investments

You may also have money tied up in your property that you could use, but you should get financial advice before doing so as it is not suitable for everyone and may not be available on all properties. Having other sources of income or savings may mean that you aren’t completely reliant on your pension pot to provide an income.

3. Do you have any debts that you need to pay?

If you have outstanding debts, for example mortgage balances, credit cards, loans or overdrafts, you should think carefully before committing any of your pension pot to repay any debt. We recommend you seek advice before making any decisions.

4. How much money will you need?As well as calculating your income, you will also need to take account of your regular outgoings.

How much money will you need to cover your essential day to day living expenses?

An income from your pension will help to cover these essential costs.

Will you have the income or savings to cover the other things you’d like to do, e.g. holidays, entertainment?

Do you need an income from your pension to pay for these extras, or would you prefer to take lump sums from your pension or use other savings to pay for them?

• Will your monthly income cover your basic monthly outgoings? You might want to think about having a guaranteed income for life to cover these basics.

• If not, then can you use some of your savings to cover these outgoings? Remember that people are living longer meaning that you will have to make your savings last longer.

• Will your income cover the things you’d like to do? Think about the extras you would like: holidays, going out etc.

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The Money Advice Service has some online tools available to help you calculate your detailed spending breakdown at moneyadviceservice.org.uk but you can also use the budget planner to help you understand your needs.

Budget planner

Monthly incomeState Pension

Workplace pensions

Private pensions

Income from other savings

Income if continuing to work

Other income

Total monthly income £

SavingsCash

ISAs

Stocks and shares

Other savings

Total savings £

Monthly outgoingsMortgage/Rent

Utility bills

Council tax

House insurance

Car insurance

Car tax

Servicing

Credit/Store card debt

Life insurance

Food

Other

Total Monthly outgoings £

Things I’d like to doEating out

Holidays

Entertainment and socialising

Other

Total monthly spend on things I’d like to do £

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■ Age 65 ■ Further 18.6 years ■ 8% living to 100 years

■ Age 65 ■ Further 21.1 years ■ 14% living to 100 years

5. How long might you need your money to last for?Rising life expectancy means that you will need your pension pot to last longer than you might think.

If you are age 65, then, on average, men will live for another 18.6 years to age 84 and women for 21.1 years to age 86*.

8% of men and 14% of women are expected to live to age 100**.

Age

Male Female65

72

79

86

93

100 8%

AverageAverage

14%

* Figures taken from the Office of National Statistics Life Expectancy at Birth and at Age 65 2011-13, published November 2014 ** Figures taken from the Office of National Statistics Historic and Projected Data from the Period and Cohort Life Table 2012,

released December 2013

If you intend to use other savings and investments, or take your pension pot as a lump sum to finance your spending, you will need to think about how long these savings might last.

It’s an important decision, and, if you get it wrong, you could run out of money.

6. Do you need to use your pension pot to secure a guaranteed income for life, or do you want to use it more flexibly?

If you do not need a guaranteed income for life and want to take your pension pot more flexibly you could take it all now as a lump sum, or take part now and leave the remainder invested to a future date.

How you choose to take your pension pot could affect how much tax you pay and/or your entitlement to means-tested state benefits. It will also affect how you can provide for your dependants if you die.

We describe each of these choices in more detail in Section 2 Your Choices Explained.

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7. Shop around

Taking an income from your pension pot

If you are considering taking an income from your pension pot, you do not have to take it from us as your existing pension provider.

Different product providers use different factors when calculating how much income they will offer you, such as where you live, your health and your lifestyle. The cost of adding features such as providing for your dependants or protecting against inflation can also vary between providers. So, by shopping around, you may be able to get a higher income than we can offer you, or a type of income product that is more suitable to your needs. This is not always the case, but we strongly recommend that you shop around before you buy.

If you do find you can obtain a higher income from another provider, you can move your pension pot to that provider without incurring any penalty (you may see this referred to as the ‘Open Market Option’ in your retirement documents).

Taking part of your pension pot now and leaving the rest invested to a future date

Likewise, if you want to access your pension pot flexibly, you do not need to take a product from us and other providers may offer more choice, lower charges or more suitable investments.

Again, we strongly recommend you shop around before you buy.

The Money Advice Service guide that’s included with your Retirement Options pack provides information on how to shop around.

1. Decide on the income you want from your pension

2. Check what your current pension provider is offering

3. Use the Money Advice Service annuity comparison table

4. Consider if you need the help of a financial adviser

The income you get from us might not be the highest you can get and we recommend you shop around.

Guaranteed Annuity Rates or other guarantees

If your pension has a Guaranteed Annuity Rate or other guarantees it will often provide you with an income for life much higher than you might normally get. If you decide to move your pension pot elsewhere, you may lose these valuable guarantees.

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8. Where to get help

Pension Wise Backed by the Government, giving you free and impartial guidance to understand your retirement options

Online: gov.uk/pensionwise

Face to face: by contacting your local Citizens Advice Bureau.

Money Advice Service Free and impartial money advice, set up by the Government

• Advice and guides to help improve your finances

• Tools and calculators to help you keep track and plan ahead

• Support in person, over the phone and online

Online: moneyadviceservice.org.uk

Telephone: 0300 500 5000

e-mail: [email protected]

Pension Service Provide quotes and information on your State Pension

Online: gov.uk/state-pension-statement

Telephone: 0845 300 0168

Probate and Inheritance Tax Helpline

Helping you to understand Inheritance Tax procedures

Online: hmrc.gov.uk

Telephone: 0300 123 1072

The Pensions Advisory Service

TPAS offer free and impartial guidance to people with workplace and personal pensions

Online: pensionsadvisoryservice.org.uk

Telephone: 0300 123 1047

Financial Advice Enables you to find a financial adviser in your area

Online: unbiased.co.ukfindanadviser.orgvouchedfor.co.ukfinancialplanning.org.uk/wayfinder

see the Money Advice Service guide in your retirement pack

The Pension Tracing Service

Find a lost pension Online: gov.uk/find-lost-pension

Telephone: 0845 600 2537

Remember: The Government’s Pension Wise service is free and impartial and is there to help you with your retirement choices.

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SECTION 2

WARNING: Guaranteed Annuity Rates

Your Royal London policy does not have a Guaranteed Annuity Rate, but if you have other pensions with Royal London or with other pension providers, these may have a Guaranteed Annuity Rate. This information will normally be shown on your annual benefit statement and your retirement documents. If you are in doubt you should check with your pension provider(s). A Guaranteed Annuity Rate will often provide you with an income for life much higher than you might normally get.

You may lose this valuable guarantee if you decide to:

• move your pension pot elsewhere

• take all your pension pot as a single lump sum

• take part of your pot now and leave the rest invested

If you chose to take a guaranteed income for life, you may lose this valuable guarantee depending on when you take your pension pot and the features that you choose. If in doubt you should check with your pension provider.

OPTION 1: TAKING ALL YOUR PENSION POT AS A SINGLE LUMP SUMYou can take all of your pension pot as a single lump sum.

If you take all of your pension pot as a single lump sum, one quarter of the amount paid will normally be tax-free and the remainder will be taxable as income.

You should consider whether this best suits your circumstances.

If you take your pension pot as a single lump sum then you will need to consider to what extent you can still meet your living expenses.

Pros Cons

You have complete flexibility to use the money whenever you like

Once you’ve spent it, it’s gone. You need to consider whether you need it to last you for the rest of your life or if you have other income you can rely on.

25% of your lump sum is tax-free The remaining 75% of your lump sum is added to your other income for the tax year and taxed as earned income. Depending on how much other income you have, taking all your pension pot as a lump sum might push you into a higher income tax bracket.

Taking your pension pot as a lump sum could affect your entitlement to means-tested State Benefits. You might get lower benefits as a result.

If you want to continue to contribute to a pension and your contributions (including those of your employer and the tax relief you receive) exceed £10,000, you may incur an additional tax charge.

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Tax

If you choose to take your pension pot as a lump sum, 25% will be tax-free, the remaining 75% will be taxed as income, i.e. depending on your total taxable income in a year, you may pay income tax on these payments, and as a result you may pay tax when you wouldn’t normally (see Peter’s example, Case Study 1) or pay tax at a higher rate than you otherwise would have done (see Joan’s example, Case Study 2).

If I have means-tested State Benefits how will these be affected?

Means-tested State Benefits are paid according to whether your income and savings fall within certain limits. These benefits include, among others, Pension Credit, Housing Benefit (for rental costs) and Council Tax Support.

If you think you might be entitled to these benefits then you need to consider if the way you take your pension pot will affect your benefit entitlement, and you may need to seek financial advice.

If you have access to the internet you can find out more about means-tested benefits on-line at gov.uk, through your local Citizens Advice Bureau, or by telephone through the Government’s Benefit enquiry line on 0800 882200 (Northern Ireland 0800 220674).

What happens if you die?

Inheritance Tax may be payable on the total value of your estate. Any pension pot you have taken as a lump sum and put into savings would form part of your estate along with the value of your house, possessions, cash, savings and investments etc less any debts and funeral expenses. If the value of all your assets exceeds the Inheritance Tax threshold in the year that you die, Inheritance Tax is payable on the value of the assets above the threshold.

It can be difficult to decide whether Inheritance Tax is payable on pension benefits. Detailed information is available by visiting the Government website hmrc.gov.uk or contacting the Probate and Inheritance Tax Helpline on 0300 123 1072. They can help you understand your Inheritance Tax responsibilities and the procedures.

If you take all your pension pot as a single lump sum, can you still keep contributing to another pension?

You can still contribute towards another pension. If you want to contribute more than £10,000 into a money purchase pension you may become subject to a tax charge. Your contributions, any contributions your employer makes, and tax relief, all count towards the £10,000 limit.

Large pension pots taken past age 75

If you want to take your pension after the age of 75, and have pension savings of more than £1.25m, then you may be prevented from taking this lump sum. If you think this might affect you then we recommend you seek financial advice.

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OPTION 2: TAKING A GUARANTEED INCOME FOR THE REST OF YOUR LIFEIf you decide that you want to take an income from your pension pot, then one of the ways of doing this is by buying a lifetime annuity which converts your pension pot into a regular income which is guaranteed for the rest of your life.

If you take this option, then whatever happens, you will get a regular income for the rest of your life. You can also choose to have that income payable to your spouse or partner in the event that you die before they do, and to protect your income against the effects of inflation.

How much income you get will depend on a number of things:

• The amount you have saved into your pension, and whether or not you want to combine other pension pots

• Your age

• Whether you choose to take any tax-free cash and how much this is

• The features you choose, such as protecting your income from the effects of inflation, or providing an income for your partner should you die before them

• Other factors such as your health and lifestyle

• The economic circumstances – generally when interest rates are lower, you get a lower income and when they are higher you get more.

Pros Cons

Pension savings are designed to provide for you during your retirement. By taking out an annuity, you know what your income will be and this is guaranteed for life. This income can be used to help with your bills and living expenses.

Buying a lifetime annuity is a ‘one-off ’ decision that cannot be changed. So you need to be sure about the choices you make (including the features of your annuity) before you commit.

Your income won’t change if the rates used in converting your pension pot into a regular income go down in the future.

You won’t benefit if the rates used in converting your pension pot into a regular income increase in the future.

Features can be added to your annuity, such as to provide protection against inflation and to provide an income for a dependant if you die before them.

Adding features to your annuity can reduce the amount of income it provides, and once your payments have started these features cannot be added or changed at a later date.

You are able to take up to 25% of your pension pot as tax-free cash, with the remainder being used to provide an income.

The more tax-free cash you take, the smaller the pension pot you’ll have left over to provide you with an income.

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How your health and lifestyle can affect how much income you receive

Some annuity providers offer ‘enhanced’ annuities. These take your health and lifestyle into account when determining the income you will receive. These can arise from fairly common factors like:

• smoking

• having high cholesterol, or

• being overweight, up to more serious or life-threatening conditions such as:

• cancers, and

• heart disease.

Your income will not go down as a result of medical information you give. You may be able to increase the income available to you if your health position is taken into account and you qualify for an ‘enhanced’ annuity. You should check that this information is being taken into account when obtaining quotes for your annuity.

Annuity features

In its simplest form, an annuity will pay you a guaranteed income for the rest of your life. However, you can choose to add features to your annuity, such as providing an income to your spouse or partner in the event that you die before they do, or to protect your income against the effects of inflation.

The main features you need to consider when choosing your annuity are shown in the table on the next page. You will need to decide how important these features are to you as the choices you make about how your income is paid will affect the amount of income you receive.

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ANNUITY FEATURESTax-free cash You can usually choose to take up to 25% of your pension pot as a tax-

free lump sum and use the remainder to purchase your lifetime annuity. However, by taking a smaller amount of tax-free cash (or no tax-free cash at all) you will receive a higher income.

Single or joint life A single life annuity pays you a guaranteed income for the rest of your life. On your death, payments will stop.

Are you married or do you have a partner or someone else who is financially dependent on you? Will they need an income if you die first? A joint life annuity continues to pay some or all of the income you were receiving to your spouse or partner if you die first. Because a joint life annuity pays an income to your chosen dependant if you die first, it will reduce the income you receive during your lifetime.

Guarantee period A Guaranteed Period will ensure that your income payments are paid for a set period of time, regardless of whether you die earlier. If you die during the annuity’s Guaranteed Period, payments will continue to be paid to your dependant(s) for the remainder of the Guaranteed Period.

An annuity with a Guaranteed Period is sometimes considered to be a substitute for a joint life annuity, but that’s not the case because it only provides an income to your dependant if you die within a specified number of years from the start of your annuity, e.g. 5 or 10 years. As such, a Guaranteed Period won’t fully protect your dependants over the long term.

Level or escalating Do you want your income payments to stay the same (a level annuity), or increase each year to protect you against some or all of the effects of inflation on your income (an escalating annuity)? A level annuity will provide you with a higher starting income, but the effects of inflation over time will reduce the amount you can buy.

Payment frequency and timing

How often do you want your income to be paid – monthly, every 3 months, every 6 months or once a year? And do you want to receive your income as soon as your annuity has been set up (in advance) or at the end of your chosen payment frequency (in arrears)?

Value protection If you die, do you want to pass on some of the value of your pension pot to a dependant? Value protection is a way of passing on some of the value, less the value of the income you have received up to the date you die. E.g. if your pension pot is £30,000 and you die after receiving £20,000 worth of income, the difference of £10,000 would be paid to your nominated dependant.

Not all providers offer this, and some limit the proportion of the value you can pass on, or will only pay if you die within a certain time period, such as before your 75th birthday.

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You don’t have to take a lifetime annuity to convert your pension pot into an income, there are some other types of annuity that will do this:

Other annuity types These have different features but the main one is that you will not receive a guaranteed income for the rest of your life.

Fixed-term annuity You are paid a guaranteed income for a fixed number of years. At the end of the period you will need to decide what to do with the remainder of your pension pot, which could include taking a lump sum payment or using the remaining pot to purchase a further income.

Investment-linked and with-profits annuities

These provide a variable income which is linked to the investment performance of the fund(s) your pension pot is invested in. This means the income could increase because of future investment performance, but could also fall in value. Investment-linked annuities may also be exposed to transactional charges (such as a fee for switching funds) or annual management charges.

If you are interested in a fixed-term, with-profits or investment-linked annuity we recommend you seek financial advice.

Tax

You can usually choose to take up to 25% of your pension pot as tax-free cash and use the remainder to purchase a lifetime annuity, although if you choose not to take a lump sum and use your total pension pot to purchase a lifetime annuity your income will be higher.

The regular income you receive will be treated as taxable income. This means you’ll still have a personal allowance and a tax code, and may pay tax on the regular income payment you receive depending on your total taxable income in a year.

HMRC determines how much tax you will pay and will advise your provider of the tax code to use, and therefore how much tax to deduct. Any tax due is deducted from your regular pension payments before they are paid to you.

Please bear in mind, when you receive quotes from us or other providers they will show your income before any tax is deducted.

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This depends on the type of annuity that you have taken:

• Guaranteed Period – if you die before the end of the Guaranteed Period you’ve chosen, your dependant will continue to receive the income until the end of this period. These payments to your dependant are treated as taxable income, i.e. depending on their total taxable income in a year, your dependant may pay income tax on these payments. However, if you die before the age of 75, then the income will be tax-free.

• Joint Life Annuity – the dependant you have chosen will continue to receive an income for the level you have chosen, for the rest of their life. These payments to your dependant are treated as taxable income, i.e. depending on their total taxable income in a year, your dependant may pay income tax on these payments. However, if you die before the age of 75, then the income will be tax-free.

• Single Life Annuity – your payments will stop when you die and no further payments will be paid to your dependants.

• Value Protection – the dependant you have chosen will receive any residual value. This payment will be treated as taxable income, i.e. depending on their total taxable income in a year, your dependant may pay income tax on this payment. However, if you die before the age of 75, then the payment will be tax-free.

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OPTION 3: TAKING PART OF YOUR PENSION POT AND LEAVING THE REST INVESTED TO TAKE AT A LATER DATEYou can use your pension pot to take payments when you need, to suit your needs and personal circumstances. Each time you take part of your pension pot you have the option to take it as either a lump sum payment or as income.

This means you can take:

• A series of lump sum payments

• Income at different times

• A mix of both

Note: Your existing pension is unlikely to offer this level of flexibility and you might need to transfer to another pension provider or into a different product if you want this option.

Different products will offer different features:

Tax-free cash

Certain products will allow you to take up to 25% tax-free cash on your whole pot upfront. If you do this, all future payments will be treated as taxable income. Other products will allow you to take up to 25% tax-free cash each time you take a payment and the rest is treated as taxable income (see tax implications below).

Investment choices/Charges

If you change providers or take out a different product you will have to make new investment choices and different (possibly higher) charges may apply.

Taking an income

Some products are designed to allow you to take a series of lump sum payments rather than income. If you want to take a regular income from part of your pot you may need to convert that part of your pot into an annuity.

Some products are designed to take income over a period of time, and you may have to specify upfront when you want to take that income.

Pros Cons

You can take control of how you use your pension pot to suit your needs whether you want to retire fully or semi-retire. You can choose how and when you take payments from your pension pot and spread this over whatever time period you want.

Unlike a Lifetime Annuity which provides a guaranteed income for life, your pension pot may run out. This may be true if you take higher levels of income in the earlier years or your remaining fund is affected by poor or low investment performance.

You can choose to use your remaining pension pot or any part of your pot to take an income at any time.

The amount of income you would receive is not guaranteed; charges may apply when you take an income; or the rates used in converting your pension pot into an income may change over time. So if you choose to take an income at a later date then the amount of income may be more or less than if you convert all your pension pot into a guaranteed income for life in one go.

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Pros Cons

Your pension pot remains invested with a potential for it to grow.

The performance of the investments, which can go down as well as up, will affect the future income you will receive. You will have to decide how much risk to take in leaving your money invested.

You might be able to take your pension pot in a way that prevents you from paying more tax. For example if taking the whole of your pension pot as a lump sum will push you into a higher tax band so that you pay a higher rate of tax because of your other income, you may be able to take a series of lump sums over different tax years which means you do not pay a higher rate of tax in any one year.

Tax laws could change in the future.

You may be able to take up to 25% of your pension pot as tax-free cash, with the remainder being used to provide an income or take as a lump sum at a future date.

The more tax-free cash you take, the smaller the pension pot you’ll have left over to provide you with an income if you choose to do this at a future date.

If you want to continue to contribute to a pension and your contributions (including those of your employer and the tax relief you receive) exceed £10,000, you may incur an additional tax charge.

Tax

You will have the option of taking up to 25% tax-free cash (although you may not be able to take this all in one go and may have to take it with each payment).

The remaining 75% will be taxed as income, i.e. depending on your total taxable income in the year you take payment, you may pay income tax on these payments, and may end up paying more tax as a result (see Peter and Joan’s examples in the Case Studies).


• Any funds still invested in your pension will be paid tax-free to your dependants if you die before your 75th birthday. If you die after age 75 then any payment will be taxed at 45% if paid before 6 April 2016, or if paid after 5 April 2016, will be treated as taxable income, i.e. depending on their total taxable income in a year, your dependant may pay income tax on these payments.

What if you want to keep paying into a pension?

You can still contribute towards a pension (depending on the type of pension you have). If you want to contribute more than £10,000 each year into a ‘Money Purchase’ or ‘Defined Contribution’ pension such as a Personal Pension or Stakeholder Pension, you may become subject to a tax charge. Your contributions, any contributions your employer makes and tax relief all count towards the £10,000 limit.

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OPTION 4: TAKING YOUR PENSION POT AT A LATER DATEIf you are approaching the retirement date you selected when you first took out your pension, you do not have to take your pension pot at that date, and can choose to take it at any time in future.

Pros Cons

Your pension pot may be larger if you’re able to pay into it for longer or leave it invested for longer.

Depending on how your pension is invested, the value of your pension pot could go down as well as up, so there is no guarantee that your pension pot will be larger if you delay taking your benefits.

You may get a higher income because your pension will not have to pay out for as long.

You may get a lower income if the rates used in converting your pension pot into an income get worse.

You may get a higher income if the rates used in converting your pension pot into an income improve.

The treatment of pensions has undergone major changes in recent years. There is no guarantee that the tax treatment of pensions or the choices available to you will remain the same in the future.

Tax

The tax you pay will depend on how you choose to take your pension pot and the tax regime at that time. There is no guarantee that the tax treatment of pensions or the choices available to you will remain the same in the future.

What happens to your pension pot if you die?

If you die before you have taken your pension pot then in most cases your provider will pay either a lump sum or an income to your dependants.

• If it is paid as a lump sum, and you die before the age of 75, it will normally be paid tax-free.

• If it is paid as a lump sum, and you die after the age of 75 it will be subject to tax at 45% if it is paid before 6 April 2016. If it is paid after that date it will be taxed as income, i.e. depending on their total taxable income in a year, your dependant may pay income tax on these payments.

• If it is paid as an income to your dependants, if you die before age 75, it will be paid tax-free. If you die after age 75 it will be taxed as income, i.e. depending on their total taxable income in a year, your dependant may pay income tax on these payments.

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SUMMARYMain Features of Your Choices

Option ✔ ✘ Risk

Take all your pension pot as a lump sum

Access to your funds Does not provide a guaranteed income

You run out of money in retirement unless you have other sources of income

Convert your pension pot into a guaranteed income for the rest of your life

Provides a guaranteed income for life with the option to provide an income for your dependants and/or protect against inflation

Once set up your income cannot be changed or cashed in

You cannot access your pension pot if your circumstances change

Take some of your pot now and leave the rest invested for another time

Can access your pension pot flexibly to take a series of lump sums or income at different times or if your circumstances change

Does not provide a guaranteed income

You run out of money or have less money to live off in retirement unless you have other sources of income

Leave your pot invested

Your pension pot may go up

Your pension pot may go down, unless it is invested in With-Profits where bonuses are added which cannot be taken away

Pension and tax rules may change which affect how you can take your pension pot in future and the amount of tax you pay

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What happens to your pension pot if you die

Option Money taken as tax-free cash or a lump sum

Funds still invested Income taken


Any lump sum or tax-free cash that you haven’t spent will form part of your estate and will be passed on to your beneficiaries in line with your will.

They may pay Inheritance Tax depending on the value of your estate.


Any tax-free cash that you haven’t spent will form part of your estate and will be passed on to your beneficiaries in line with your will.

They may pay Inheritance Tax depending on the value of your estate.

You can choose an income for life that is guaranteed to be paid for a certain length of time even if you die earlier. Such payments will be paid to your beneficiary

and/or

You can choose for your dependant to be paid an income if you die. You will need to choose the amount and who will receive it when you take your pension.

If you die before your 75th birthday the income will be payable tax-free. If you die later, the income is taxable.


Any lump sum or tax-free cash that you haven’t spent will form part of your estate and will be passed on to your beneficiaries in line with your will.

They may pay inheritance Tax depending on the value of your estate.

Any funds remaining invested in your pension will be paid tax-free if you die before your 75th birthday. If you die later, then it will be taxed at 45% if it is paid before 6 April 2016 and as income if it is paid after 5 April 2016.

If you have taken an income in a way which provides for payments to your dependant on your death, then if you die before your 75th birthday the income will be payable tax-free. If you die later, the income is taxable.

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Leave your pot invested with the aim of receiving higher benefits later on

Your pension pot can be paid as a lump sum which will be tax-free if you die before your 75th birthday. If you die after then it will be taxed at 45% if it is paid before 6 April 2016 and as income if it is paid after 5 April 2016.

Your pension choices and tax

Below is a summary of the main points and choices you need to consider when deciding how to take your pension pot.

It is important that you understand how taking your pension pot will affect your tax position and the amount of tax you will pay.

You may want to discuss this with a financial adviser. The enclosed Money Advice Service guide includes details of how to find a financial adviser in your local area. Advisers may charge for providing advice and should confirm any cost to you beforehand.

Option Tax-free Taxed Future payments


25% tax free. 75% is taxed as income.


Up to 25% tax-free cash.

Income is taxed.


Take up to 25% of the payment as tax-free cash.

The remainder is taxed as income.

Each future payment can be taken with up to 25% tax-free cash and the remainder taxed as income.

Take up to 25% of your whole pension pot as tax-free cash.

Each future payment will be taxed as income.

Leave your pot invested

The tax you pay will depend on your choices and the tax regime when you come to take your pension pot.

Examples of how this might work are included in the Case Studies.

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Case Studies

To make the examples easier to understand we have used 2015/16 tax year figures throughout and assumed there is no growth in the remaining funds.

Example A – Peter is age 64 and has saved into his pension over a number of years and now has a pension pot worth £20,000. He has no other income and a personal tax allowance of £10,600 (which means he only pays tax on income over £10,600). He needs to take some money from his pension pot before his State Pension is paid from age 65.

Peter’s choices

Peter will receive

Peter will pay in tax

Option 1Take the

£20,000 as a lump sum

£5,000 is paid tax-free.

£15,000 taxed as income.

Peter will have to pay tax on the difference between his income (£15,000) and his annual allowance (£10,600) at a basic rate of 20%.

Peter will have to pay tax of £880.

Peter will receive £19,120 from his pension pot.

Peter pays £880 in tax.

Option 2Convert

his pension pot into a

guaranteed income for the rest of his life

Peter takes £5,000 tax-free cash.

Peter uses the rest of his pension pot to buy an annual retirement income of £625 each year for the rest of his life.

Peter’s income is less than his annual allowance of £10,600 each year and so he pays no tax.

Peter will receive a one-off payment of £5,000 and £625 each year for the rest of his life.

Peter pays no tax.

Option 3Take

£10,000 as a lump sum now and leave the rest invested

to take at another time



£10,000 remains in the pension pot to take at a later date either as a lump sum or as an income for life.

The £7,500 that Peter takes now is less than his annual allowance and he has no other income so no tax is payable.

Peter will receive £10,000 from his pension pot and £10,000 will remain invested to take at another time.

If current tax rules remain unchanged then Peter will be able to take the first 25% of his remaining funds tax-free, with the rest taxed as income.

(See below for what happens when he takes his remaining funds.)

Peter pays no tax.

Option 4Leave all

his pension pot invested to take at a future date

The tax Peter will pay will depend on his choice and the tax regime when he comes to take his pension pot

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If Peter chooses Option 3 to take £10,000 as a lump sum and leaves the remaining invested, and then takes a second lump sum of £10,000 the year after when, in addition, he will also start to receive the State Pension of £115.95 per week (£6,029 pa) in tax year 2015/16:

Peter’s choices

Peter will receive


Year 1Peter takes £10,000 as a lump

sum now and leaves the

rest invested to take at

another time




The £7,500 that Peter takes now is less than his annual allowance and he has no other income so no tax is payable.

Peter will receive £10,000 from his pension pot and £10,000 will remain invested to take at another time.

If current tax rules remain unchanged then Peter will be able to take the first 25% of his remaining funds tax-free, with the rest taxed as income.

Peter pays no tax.

Year 2Peter

takes his remaining

funds of £10,000 as a lump sum



Peter is taking £7,500 which is classed as income from his pension pot and will receive a £6,029 state pension, making his total earnings £13,529.

Peter does not pay tax on the first £10,600 of his income, meaning that only £2,929 is taxable.

Peter will pay 20% basic rate income tax on the £2,929 meaning that he pays tax of £585.

In total, Peter has received £19,415 from his pension pot.

Peter has paid £585 in tax.

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Alternatively, if Peter had chosen to take 25% tax-free cash from his whole pension pot and left the rest invested to take the following year:

Peter’s choices

Peter will receive


Year 1 Peter takes 25% of his pension pot

(£5,000) as tax-free

cash and leaves the


another time



Peter receives £5,000 from his pension pot and £15,000 will remain invested to take at another time.

If current tax rules remain unchanged then when Peter takes the remainder of his pension pot it will be taxed as income.

Peter pays no tax.

Year 2Peter

takes the remainder of

his pension pot as a lump

sum

£15,000 is taxed as income.

Peter is taking £15,000 which is classed as income from his pension pot and will receive a £6,029 state pension, making his total earnings £21,029.

He will pay tax on the difference between this and his annual allowance of £10,600.

Peter pays £2,086 tax.

In total, Peter has received £17,914 from his pension.

Peter has paid £2,086 in tax.

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Example B – Joan has saved into a pension over a number of years and now has a pension pot worth £50,000. She will also start to receive the State Pension of £115.95 per week (£6,029 pa) in tax year 2015/16. Joan has a personal tax allowance of £10,600 (which means she only pays tax on income over £10,600), however, she will pay higher rate tax on any taxable income over £31,785.

Joan’s choice Joan will receive

Joan will pay in tax

Option 1Take the

£50,000 as a lump sum



Joan is taking £37,500 which is taxed as income plus a state pension of £6,029 (based on the 2015/16 figures), giving a total income of £43,529.

Joan does not pay tax on the first £10,600 of her income, meaning that only £32,929 is taxable.

She pays tax at basic rate of 20% on her taxable income up to £31,785, meaning £6,357 of tax is payable at 20%.

The remaining £1,144 is taxed at 40%, meaning £458 of tax is payable at 40%.

So, in total Joan will have to pay tax of £6,815.

Joan will receive £43,185 from her pension pot.

Joan will pay £6,815 in tax.

Option 2Convert

her pension pot into an income for the rest of

her life

Joan takes £12,500 as tax-free cash.

Joan uses the rest of her pension pot to buy an annual retirement income of £1,875 each year for the rest of her life.

Joan has other income of £6,029 but even when added to the £1,875 this is below her personal allowance of £10,600 and no tax is payable.

Joan will receive a one-off payment of £12,500 and £1,875 each year for the rest of her life.

Joan pays no tax.

Option 3Take

£10,000 as a lump

sum now and leave the


another time




Joan is taking £7,500 which is taxed as income plus a state pension of £6,029 giving a total income of £13,529. Joan does not pay tax on the first £10,600 of her income, meaning that only £2,929 is taxable.

Joan will pay 20% basic rate income tax on the £2,929 meaning that she pays tax of £585.

Joan will receive £9,415 from her pension pot and £40,000 will remain invested to take at another time.

If current tax rules remain unchanged Joan will be able to take the first 25% of future payments tax-free.

(See below for what happens when she takes her remaining funds.)

Joan pays £585 in tax now.

Option 4Leave all her pot invested to take at a future date

The tax Joan pays will depend on her choice and the tax regime when she comes to take her pension pot.

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If Joan chooses Option 3 to take £10,000 as a lump sum and leave her remaining pension pot invested, and then takes a second lump sum of £10,000 the year after:



Year 1Joan takes £10,000 as a lump

sum now and leaves the


another time




Joan is taking £7,500 which is taxed as income plus a state pension of £6,029, giving a total income of £13,529.




If current tax rules remain unchanged Joan will be able to take the first 25% of future payments tax-free.

Joan pays £585 in tax now.

Year 2Joan takes

a second lump sum of

£10,000 leaves the remaining £30,000 invested

to take at another time




Joan is taking £7,500 which is taxed as income plus a state pension of £6,029 (based on the 2015/16 figures), giving a total income of £13,529.




In total Joan has received £18,830 from her pension and has £30,000 still invested.

Joan pays another £585 in tax on this payment.

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Joan then chooses to take the remaining £30,000 as a lump sum the year after:



Year 3Joan

takes her remaining

pension pot of £30,000

as a lump sum



Joan is taking £22,500 as taxable income, plus a state pension of £6,029 (based on the 2015/16 figures), giving a total income of £28,529.


Joan pays tax at Basic rate of 20% on her taxable income up to £31,785 meaning £3,586 of tax is payable at 20%.

Joan will receive £26,414 from her pension pot.

In total, Joan has received £45,244 from her pension.

Joan pays tax of £3,586 on this payment, and in total has paid £4,756 in tax.

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SECTION 3

OUR PRODUCTS AND SERVICES EXPLAINEDWe are not able to offer products to meet all possible customer needs.

The table below sets out the products and services we can offer you, and where you will need to approach another provider for a suitable product.

Option What we can offer What we don’t offer (and you will therefore need to

consider another provider)

Taking all your pension pot as a single lump sum

You can take all your pension pot as a single lump sum.

Taking a guaranteed income for the rest of your life

We can offer you a lifetime annuity.

If you wish to take a guaranteed income for life then we provide an Annuity Bureau service.

We only offer lifetime annuities and do not offer:• fixed term annuities• with-profits annuities• investment-linked annuities

We provide an Annuity Bureau service that will obtain quotes from a panel of 10 providers to offer you the highest income from those providers.

We offer enhanced annuities and will take your health into account when offering an annuity.

You may be able to combine other pension pots that you have, either with ourselves or elsewhere. This may give a higher income than taking separate annuities.

You can find more information on our Annuity Bureau service in the next part of this guide.

We do not offer annuities from all providers in the market. Different product providers use different factors in calculating how much income they can offer, such as where you live, your health and lifestyle. The costs of adding features can also differ, so you might get a higher income from a provider who is not on our panel.

We can offer the following annuity features:• joint life annuities• guarantee periods up to 10

years• escalating annuities

We do not offer:• guarantee periods longer than 10 years• value protection• annuities where the amount of income

can be changed

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Option What we can offer What we don’t offer (and you will therefore need to

consider another provider)

Taking part of your pension pot and leaving the rest invested to take at a later date

If you would like to take your pension pot as a series of flexible cash withdrawals, please contact us for more information.

We do not currently offer the option to take a fixed income if you take part of your pension pot. If you wish to do this you will need to transfer your pension pot to another provider.

Other product providers may also offer different investment choices or have different charges.

Taking your pension pot at a later date

You can delay taking your pension pot to a later date, providing you take your pension pot by age 75.

If you wish to delay taking your pension pot until after age 75 you will need to transfer your pension pot to another provider.

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THE ROYAL LONDON ANNUITY BUREAU If you want to take a guaranteed income for life from your pension pot we’ll offer you a lifetime annuity from a panel of ten leading providers in the market. The providers whose annuities we currently offer are:

• Aviva • Canada Life • Hodge Lifetime • Just Retirement • Legal & General

• LV= • MGM Advantage • Partnership • Prudential • Scottish Widows.

You can contact us by phone or use our on-line annuity planner. Details are set out in the ‘What you need to do now’ section of your Retirement Options pack.

We’ll give you information on the annuity options available so that you can make your own informed decision on the type of annuity that best meets your requirements. Once you’ve chosen the annuity features you want, we’ll get you annuity quotes from our panel of providers to find the one that will pay you the highest retirement income. And once you’ve reviewed the quotes and found the one that’s best for you, we’ll take all the hassle out of completing your annuity purchase by sending you the application pack and helping you to complete it.

Each step of the way we’ll make sure you’re clear about the choices you’re making, and explain everything in more detail if you’re unsure.

Your health and lifestyle

The annuity quotes we’ll get for you from some of our panel of providers will take your health and lifestyle into account. With most other financial products, such as life insurance, you get penalised for being in poor health. But with annuities, a medical condition (or lifestyle factors such as being a smoker or being overweight) could actually boost the amount of income you receive.

We take over 1500 medical conditions into account, and even minor health conditions could qualify you for a higher retirement income. So, it’s important that you tell us as much about your health and lifestyle as you can.

Combining pension pots?

If you have other pension pots, either with ourselves or held elsewhere, you may think about combining them. This may give you a higher level of retirement income than if you were to take out a separate annuity for each one.

But you should check whether your pension pots include a Guaranteed Annuity Rate or other form of valuable guarantee – if you’re unsure you should ask your pension provider or check your pension policy documentation. If they do, and you decide to shop around and move your pension pot away from your current provider or take your pension savings as a lump sum, you may lose these valuable guarantees.

There are also certain types of pension we cannot combine, such as company pension schemes that are linked to your salary or length of service (sometimes called a ‘defined benefit’, ‘final salary’ or ‘career average earnings’ scheme).

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IMPORTANT INFORMATION ABOUT THE ROYAL LONDON ANNUITY BUREAU Non-advised service

We are a non-advised service which means that we can’t give you advice. If you feel as though you need advice, we recommend you speak to a financial adviser. The Money Advice Service guide includes information on how to find a financial adviser in your local area.

Your right to shop around

We offer annuities from 10 annuity providers in the market. As we don’t offer the annuities of all providers in the market, we cannot guarantee to get the best annuity rate for all customers in all circumstances.

You don’t have to buy an annuity through our service - by shopping around you might obtain a higher income than we can offer, or a type of annuity that is more appropriate to your needs. Buying an annuity is a one-off decision that will set the level of your retirement income for the rest of your life, and so it’s important that you shop around to make sure you buy the right type of annuity for you. The Money Advice Service guide that’s included with your Retirement Options pack provides information on how to do this.

Annuity funds below £10,000

Your annuity fund is the amount of your pension pot that you use to buy your annuity AFTER you’ve taken any tax-free cash. Not all annuity providers will offer a retirement income for annuity funds of less than £10,000, and most others normally have a £5,000 minimum. As such, if your annuity fund is less than £10,000 you won’t get a quote back from our entire panel of providers – we’ll confirm who has quoted when we provide you with quotes.

Charges

We do not charge a fee for our service. Instead, we will be paid a commission from the provider of your annuity. This commission payment helps cover the costs of providing the service. We’ll confirm the amount of commission we receive in the annuity illustration that we’ll send to you. The amount of commission we receive will be taken into account in the quote you receive.

Sharing your personal information

In order to obtain annuity quotes that are tailored to your specific circumstances, we will ask you for personal information which may include (but is not limited to) information about your health and lifestyle. We will share this information with our chosen quotation provider ‘IRESS’ and our annuity panel providers. By using the Royal London Annuity Bureau you are consenting to us sharing your personal information for the purpose outlined. For full details of our Privacy Policy please contact us.

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MKT4041_0250_RL 01/2015

Royal LondonRoyal London House, Alderley Road, Wilmslow, SK9 1PF

royallondon.com

The Royal London Mutual Insurance Society Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. The firm is on the Financial Services Register, registration number 117672.

Registered in England and Wales number 99064. Registered office: 55 Gracechurch Street, London, EC3V 0RL

Documents

GUIDE TO YOUR RETIREMENT · 2015. 4. 7. · Step By Step Guide If you don’t know how much you are likely to get from these pension arrangements then you can contact your employer