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Pension Payments: Annuity

Pen­sion pay­ments are the process whereby a pen­sion pays out from the fund you have accu­mu­lated to you through one of the main meth­ods of tak­ing ben­e­fits from your pen­sion such as a tax free lump sum, annu­ity pay­ments or drawdown.

Each of these has vary­ing lim­its and rules on how they work and what you can do with them in terms of pen­sion pay­ments and are explained below.

Tax Free Cash Lump Sum Pen­sion Payments

When you reach the age of 55 you may at any time take 25% of your fund as a tax free cash lump sum. Once you have taken the full tax free cash your pen­sion is con­sid­ered crys­tallised and you may not take any fur­ther tax free cash from it unless you make fur­ther con­tri­bu­tions to your fund.

Although this is pen­sion pay­ments in terms of annual income, the 25% tax free cash is a pay­ment in that it is paid directly to you and you are free to use it how­ever you wish.

You may even take the 25% at stages and not all at once mean­ing you may if you desire cre­ate your own type of pen­sion pay­ments from it by tak­ing small bits at a time such as 5% a year for 5 years until you require fur­ther income.

Pen­sion Pay­ments: Annuity

Annu­ity con­tracts are the tra­di­tional way for pen­sion pay­ments to be made but since the bud­get report this year are now no longer required by law to be taken by the lat­est date of 75 and you may instead receive your pen­sion pay­ments in one of many other forms.

In essence, pen­sion pay­ments in annu­ity is a con­tract between you and an insur­ance com­pany whereby you sell your pen­sion fund to them in exchange for series of set pen­sion pay­ments from them.

The pen­sion pay­ments you receive from an annu­ity will depend on the annu­ity rates you when you take an annu­ity, the age you take an annu­ity at, the size of your fund to name a few. For a full list it is appro­pri­ate that you inquire from a suit­able inde­pen­dent finan­cial adviser and seek their advice on your retire­ment options and what pen­sion pay­ments you may be able to receive.

Pen­sion Pay­ments: Drawdown

Draw­down can be split into either capped or flex­i­ble draw­down when you are look­ing to take your pen­sion pay­ments. To take flex­i­ble draw­down you will require an annual income of over £20,000 from your rel­e­vant income and as such you should con­tact a finan­cial adviser to see if you qual­ify for it.

How­ever, most peo­ple will only qual­ify for capped draw­down which lim­its the amount of pen­sion pay­ments you can take from your pen­sion fund to 100% of the appro­pri­ate GAD limit at that time.

With the removal of the need to buy an annu­ity by the age of 75 this option has proved a viable alter­na­tive for those who do not wish to sell their pen­sion to an insur­ance com­pany and instead pre­fer to keep it in their own pen­sion fund whereby they can receive direct pen­sion payments.

There are of course risks with draw­down of pen­sion pay­ments such as the pos­si­bil­ity that you may use up all of your fund before you retire which is not pos­si­ble with an annu­ity but it is not with­out its positives.

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