Having successfully built up a pension fund during your working life, there will come a time when you will need to make some important decisions about how to use this fund. These decisions involve how you intend to draw your pension income to ensure the benefits best suit your needs in retirement. It is normal for people who are retiring to convert a portion of their pension fund into a tax-free lump sum with the balance used to purchase an annuity.

What is an Annuity?

With an annuity, the deal is that you swap your pension fund for an income for as long as you live. The amount of income the insurance company offers you in exchange for your pension fund is called the 'annuity rate'. Annuity rates can vary and you don't have to buy your annuity from the company that's managing your pension fund.

An annuity pays you an income for the rest of your life. Unlike other investments, it cannot be used up - however long you live.

From 6 April there will be two options open to those reaching age 75, who haven’t yet purchased an annuity. The first, and most likely option, is to simply buy an Annuity. For some, there remains the option to buy an Alternatively Secured Pension (ASP). As of April, those in Alternatively Secured Pensions (ASPs) will be forced to take income of at least 65% of the comparable annuity rate for a 75 year-old, up to a maximum of 90%. Those who fail to take the minimum income will face a charge on the difference between the actual income drawn and the minimum amount.

On the death of a pension scheme member any remaining ASP funds can only be used to pay dependants’ pensions, given to a charity or in limited circumstances paid to an employer. Any other payment will face an unauthorised payment charge of up to 70%.

Clearly, this is an important and complex area, and it is strongly suggested you take Independent Financial Advice before acting. We would be delighted to help.