Pharmacists Choosing The Right Option At Retirement - Unsecured Pension (USP)
There are numerous options for pharmacists to produce income in retirement from their accumulated pension funds. In the first of a series of detailed articles, we took a look at guaranteed annuities. Subsequently we examined investment-linked annuities. In a further article we considered the option of phased retirement, also known as staggered vesting. Here in this piece, we will take the opportunity to explore the option of Unsecured Pension (USP), also known as income drawdown or income withdrawal.
The foundations for USP were introduced in the Finance Act 1995, allowing personal pension policyholders to defer annuity purchase until age 75 and instead draw income directly from the pension fund. In 1999 this was extended to money purchase occupational schemes. However, this was poorly received largely due to the greater flexibility of the personal pension version. This and the general lack of administrative system amendments to facilitate it meant that most individuals seeking to enjoy income withdrawal did so by way of transferring to a personal pension product.
In April 2006, pension simplification removed the distinctions between the two versions, and indeed opened up the opportunity for retirement annuity contract holders to take advantage of this. However, once again due to the constraints of older IT systems, those with money purchase occupational scheme and retirement annuity contract funds generally accessed this feature via a transfer to a personal pension plan.
The circumstances where unsecured pension may be considered to be appropriate and / or advantageous are: -
• To provide for maximum tax free cash at the outset whilst providing no income. Indeed, this is presently the sole option of doing so and a number of clients we have acted for have considered it for this very reason.
• To provide for a flexible level of income. This may be in situations where an individual is slowly phasing into retirement, perhaps going part time before fully retiring, or where they enjoy multiple sources of income and can take a holistic approach to their retirement income planning.
• Where an individual wishes to defer annuity purchase, for reasons of their or their spouse / civil partner’s age, particularly when retiring relatively young, or for perhaps health reasons, where the life expectancy of the individual or widow /widower is uncertain.
• Where a sophisticated investor wishes to retain their pension fund invested in assets such as property or equities.
• To provide greater death benefits than are available through an annuity.
Whilst these plans have many advantages, one should be aware that they are complex investments which should only be considered with the benefit of professional, independent financial advice. Indeed, these investments are not suitable for everyone and they have their disadvantages. There are relatively high associated administrative and advice costs and as such they are generally only suitable for those with funds in excess of £100,000, although a small number of providers will accept lesser amounts. Clearly there is an associated investment risk and, therefore, careful consideration needs to be given to creating a balance between this risk and the need to return performance adequate to cover inherent charges and mortality risk, including the possibility that annuity rates may not increase with age as expected.
There are both advantages and disadvantages to unsecured pension and ones that should not be considered without the benefit of professional, independent financial advice. Should you require assistance in this regard, please do not hesitate to contact one of our Financial Services Partners, Steve Prosser, Jeff Crewdson or Chris Raggett to discuss your requirements more fully.
Date of Article: 3rd August 2009
