IN THE BACK
MY FLEXIBLE
FRIEND
Head of Trustnet Direct John Blowers
asks whether it is better to buy an
annuity or go into flexi-access drawdown
T
he previous issue of Trustnet
Magazine looked at strategies
investors should look at as they
approach retirement.
Now we are on the question every
retiree faces: do you buy an annuity
or go straight into flexi-access
drawdown?
There are also other attractive
choices in certain situations, prefull retirement and once you are in
drawdown later on in retirement.
We will look at four options:
flexi-access drawdown, UFPLS
– uncrystallised funds pension
lump sum, annuities and a hybrid
strategy case study.
You can access your pension at
55, but many of us won’t retire
until we are nearer to 65. The
temptation to dip into this money
may be strong, but while you’re
earning and contributing to your
pension, you should probably
resist.
After all, we’re living longer
and your pension may need to
last longer than you originally
thought.
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However, in some circumstances
you may want to access some of
your pension before you retire. In
such instances, rather than going
into full drawdown, you can ringfence some of your pension pot
and access it using a UFPLS.
UNCRYSTALLISED FUNDS
PENSION LUMP SUM
(UFPLS)
Taking a lump sum out of your
pension from the age of 55 is
known as taking an uncrystallised
funds pension lump sum (UFPLS).
Every time you take a UFPLS, 25
per cent is tax-free and the rest is
taxed as income. If you reach 75
and have an insufficient lifetime
allowance, the tax-free percentage
will be lower.
WHY TAKE LUMP SUMS?
Anyone who doesn’t need their
full tax-free cash yet, nor a regular
income from their pension, can
take out periodic lump sums.
There is no requirement to take a
pension all in one go.
The remaining pension stays
invested, meaning the fund
value and future income is not
secure. Keeping it invested creates
potential for growth, but be
warned: taking lump sums out
will reduce what is left to provide
income in the future.
Buying an annuity used to be the
default position at retirement, but a
simple calculation shows keeping
your money invested should give
you more to spend every year.
Before we look at a comparison,
we need to discuss death. We are all
living longer on average, but many
of us are living well into our 80s
and 90s.
The Office for National Statistics
says children born now are
expected to live to between 82 and
85, whereas those of us nearing
retirement now are expected to live
until our late 70s.
When you are planning your
retirement, you should have an
idea of how long you will live.
We have compared four different
pension pots at retirement