What is an Unsecured Pension?
Buying an unsecured pension is often a popular other alternative to purchasing a lifetime annuity. An unsecured pension can also be quoted as Income drawdown, pension drawdown, or simply drawdown. Although the product varies in name, the principal is the same that you can withdraw from the the fund whilst it remains invested. They are generally used with pension pots of over £100k. There is no minimum amount that can be withdrawn, but the maximum is 120% of the level lifetime annuity payable to a single person of your age and sex. What is left over after you withdraw can be utilised to purchase a lifetime annuity at any point.
The USP is open to anyone who is currently paying into a personal or stakeholder pension scheme. Be warned though, some schemes will not operate a USP on smaller pension pots. Those who are in an “occupational money purchase scheme” could be eligible for a USP, should the scheme allow. If your employers pension scheme does not allow for a USP you must transfer the rights over into a different pension scheme. However you may have to forgo certain guarantees an entitlements, such as being able to get a cash free lump sum greater than a quarter of the value of the fund. This is a good way of accessing an income from your pension fund, while the rest of the money stays invested.
USP in practice
Under a USP you can withdraw a quarter of your pension fund tax free – the rest will be subject to taxation. However it must be pointed out that the rest of your pension find will be invested in either the stock market, property funds, government gilts, bonds and so the value of the fund or the level of income you withdraw from it are not guaranteed to always increase, as these assets can also fall in value, and have done in may cases in the past 18 months. You should be warned that if you take the maximum income your fund will empty out much quicker than if you took a smaller amount.
Reviews
Your pension provider is obliged to review your income level every five years. This is to check that you do not breach levels stipulated by the HMRC (HM Revenue and Customs). You can take money out of your fund as long as you do not exceed these limits. There is also the option to cancel the arrangement and get an annuity (either short term or lifetime at any point). Aside from buying an annuity, another option is to vary the amount you withdraw as income or vary the funds with are linked to your investment.
Up until April in 2006, once you reached 75 you were forced to buy an annuity. However now you have the alternative option of acquiring an Alternatively Secured Pension (ASP). Someone with an ASP can continue to withdraw an income and invest their savings but within set limits relating to income and death.
The smallest amount you can withdraw from the fund as an income is “55% of an amount calculated by applying the funds available to a table produced by the Government Actuaries Department (GAD). Please note that an ASP is one of the more complicated areas which needs speclialist advice from a Independent Financial Adviser of Annuity Specialist.
Death
There is of course always the chance that you could pass away before you reach 75. In this instance if you have not already bought an annuity, your pension fund can be bequeathed to your partner. They will then have several options to choose from including taking all or part of the fund as a lump sum, continuing to withdraw income or buying an annuity with the total amount,
Before taking an income drawdown you should always seek independent and professional financial advice. The schemes and options can be complex, and are not suited to all retirees, especially those with smaller pension pots and / or no other income or assets. There is of course an element of risk as the increases in your income and future returns are based upon the performance of the asset-backed investments linked to your own investment.
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