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Annual Reviews

 

As already explained, the amount of income you can withdraw is subject to an upper limit. This limit is calculated under rules set by HM Revenue & Customs (HMRC) (formerly the Inland Revenue) and standard actuarial tables prepared by the Government Actuary’s Department (GAD). You can choose an income anywhere between zero and the upper limit. There is a statutory requirement for the limits to be re-calculated every five years, until you buy an annuity or go into ASP.

 

This shows how USP can work over time. In this example, the maximum tax-free cash lump sum has been taken at the outset, with the remaining monies (75%) invested in USP investment funds. An income is then drawn in the first year (below the allowable income limit - shown here as the dotted lines). Every year the income can be varied, and every five years, the income limits are recalculated. At each review, the allowable income could go down or up depending primarily on investment returns.

 

Five years is a long time and therefore the Annuity Bureau standard practice is to review your plan with you annually. At each annual review your Annuity Bureau Consultant will check the progress of your plan and discuss this with you, taking into account any changes in your own circumstances. Your consultant will suggest a suitable course of action for you, depending on the results of the review.

 

At each statutory five-year review, we will advise you of the revised limits. This may mean that you will have to increase or lower your income to keep within the maximum. Rises and falls in the value of investments will also affect your income levels. High income levels may not be sustainable if the value of your underlying investment falls. Taking withdrawals may erode the capital value of your fund and result in lower income in the future.

 

You can make changes to your USP plan, such as varying the amount of income you are withdrawing or changing the funds your pension is invested in. If you and your Annuity Bureau Consultant decide the time is right, you can use the money that is left in your pension fund to buy a lifetime annuity from which you will get your pension income. Your USP stops at this point.

 

You can decide to ‘cash-in’ your USP at any time and use the monies to buy an annuity. In this example, the USP policy was completely encashed for annuity purchase at age 70. In practice, you can also buy annuities in stages up to age 75.

 

Annuity rates usually rise with age, so if you delay buying an annuity you might expect a slightly higher annuity rate than you would have got if you had bought a lifetime annuity when you retired. But because people are on average living longer it could be risky to assume that annuity rates will be higher in future. You should be aware that annuity rates could fall or rise for various reasons. It is possible that when (if) you purchase an annuity, annuity rates may have reduced to a lower level than at present.

 

The above graph depicts the annual annuity rate for a male aged 65 with a wife aged 62. The cost of the Compulsory Purchase Pension Annuity is £100,000. The annuity is paid monthly in arrears without proportion, is guaranteed for 5 years and pays a 50% Spouse’s pension. The annuity escalates at 3% per annum.

Source: The Annuity Bureau – April 2008

 

 

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