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