THIRD WAY PENSION PRODUCTS
Most of the pension product variables are traditionally divided between two main routes – Annuities and Pension Drawdown. But there is an alternative approach, one that bridges the gap between these two – a form of hybrid appropriately named the Third Way Pension.
It may be helpful to look in more detail at Third Way Pensions and the advantages and disadvantages it may offer.
Fixed Term Annuities – how they work
Third Way Pension Products are generally centred around the concept of a Fixed Term Annuity – these work in a similar way to conventional Annuities, but have the additional advantage of greater flexibility.
A Fixed Term Annuity is structured in a way that provides a guaranteed income for an agreed period of time – typically, between 3 and 15 years, ending before your 90th birthday. At the end of that fixed term, you have a guaranteed maturity value that carries no investment risk.
From the outset of this type of Annuity you may choose to include death benefit options, including provision of pensions for your dependents and capital protection. Upon maturity, any options you have selected may be altered to provide a flexibility you do not have with a conventional Annuity.
Fixed Term Annuities – options
The flexibility of a Fixed Term Annuity does not stop there. There are further options designed to give you further control over the nature and value of your pension arrangements:
• They may last from any period between 3 and 15 years – provided maturity is reached before your 90th birthday.
• For the remainder of your life during that term, you receive a fixed income – subject only to certain limits imposed by the Government Actuary Department (GAD) – with a guaranteed maturity value.
• For the duration of the term, you may choose any level of income you care – or, indeed, none at all – but if you choose a fixed level of income or one that increases each year for an amount less than inflation, your income may not keep pace with changing prices.
• The income you receive may also be changed by any tax changes made by the government during the term of the Annuity.
• Both income and maturity value are guaranteed – and any income subject to GAD limits is paid upon maturity.
• Optimum flexibility – at both the start and maturity of the plan – is granted through Drawdown rules.
• With a minimum investment of £10,000, you may transfer either crystallised or un-crystallised funds.
• Fixed Term Annuities may also include death benefits, variously providing a joint life option, an income guarantee for a minimum period of time, capital protection, or dependents’ income protection.
• On maturity of your Fixed Term Annuity, you may buy a conventional Lifetime Annuity, transfer to a Drawdown arrangement, or invest in a further Fixed Term Annuity.
Fixed Term Annuities – advantages
• Immediate access to the whole of your pension’s tax-free cash sum.
• A guaranteed, fixed level of income throughout the agreed term.
• An alternative to the purchase of a conventional Annuity – which may be deferred indefinitely.
• Flexible options on which to base your income at the end of the fixed term.
• No investment risk.
• An opportunity to benefit from improvements to annuity rates in the future.
Fixed Term Annuities – disadvantages
• Although the maturity amount at the specified retirement age is guaranteed by the pension provider, the income that it can buy in the future (i.e. at maturity) is not guaranteed.
• If Annuity rates fall in the future, your income may be lower than those that are currently available.
• The terms of a Fixed Term Annuity are determined from the outset and may not be varied, even if your circumstances change.
• Unless you choose optional death benefits, any income from the plan ceases upon your death.
• The maturity value of a Fixed Term Annuity may be less than if the fund had been invested in a conventional Drawdown.
Fixed Term Annuities do not provide the Third Way that is suitable for everyone.
There are so many different paths to the successful management of your pension. It is important to choose the most appropriate one, since you want to make the most of the pension for which you have worked and saved so hard throughout your working life.
If you would like to discuss your options in more detail and draw on the specialist, expert advice we provide here at Independent Pension Specialists Ltd, simply call us on 01622 238000 or complete the “Contact Us” form.