The largest hill on the horizon as you enter your sixties is, of course, your retirement. In your financial life cycle, the main task is to turn your pension savings into an income, as your working life comes to an end.
The most popular way of doing this is by purchasing a pension annuity with your pension savings. This pays out a guaranteed income for the rest of your life, and can be a fixed sum, or can be set to increase each year, in order to account for inflation.
However, there are various other types of annuity, and your financial adviser can recommend what may be best for you.
First you must decide who should benefit from your pension. Should it benefit you alone, or support your family as well?
Types of Pension Annuity
A single life annuity pays only to you, and ceases upon your death. A joint life annuity continues to pay out after your death, so that your pension benefits your spouse until their death, or your children, for an agreed term.
Enhanced pension annuities pay out a higher regular income to those with health problems.
A with-profits pension annuity invests your pension and has the potential to achieve for you a higher income, although your payments may also fall, depending on the performance of the underlying investment. Some products offer the security of a guaranteed minimum payment.
An immediate life annuity is not bought with your pension fund. You buy it with other money, effectively turning a savings sum into an additional regular income.
A flexible annuity is an increasingly popular choice and allows you to invest your pension in a range of funds, with your income then linked to the performance of those funds. The ‘flexible’ aspect refers to the fact that your income is not fixed – within limits, you can vary the amount of income you take.
At this point, with the help of your financial adviser and solicitor, you should check that all is in order with your will.
You may have already addressed the prospect of Inheritance Tax, but may now wish to gift money to your children from your pension lump sum. Bear in mind that you must live for 7 years after the gift, for it to be free from tax.
If you own your home jointly with your spouse, you may consider changing to a ‘tenants in common’ ownership, which enables the value of the house to be passed to your children in two separate halves, further enhancing your Inheritance Tax planning.
Caution is needed here. If you gift your home to your children, but continue to live in it rent-free, this is classified as a ‘gift with reservation’, and the house is still counted as part of your estate when you die – thus rendering its value subject to Inheritance Tax.
