YOUR RETIREMENT

MAKING SENSE OF THE OPTIONS

Is This Guide For You?You must be 55 or older to take your pension benefits.

The guide is aimed at ‘money purchase’ plans such as personal pensions, stakeholders or company schemes which build up a pot of money for retirement without guaranteeing an income.

If you have a salary-related pension plan from an employer, the income will be paid directly by the pension scheme. The amount you receive will depend on how long you worked for the company and how much you were earning at the time you left. The options listed in this guide are not applicable to ‘final salary’ schemes of this type.

If you are unsure what type of pension plan you have, your provider will be able to provide this information to you.

If you are over 60 and your total pension fund is very small, it may be possible to take all of your benefits as a cash lump sum. This is known as trivial commutation. The amount you can take in this way is dependent upon limits set by the government, and is subject to change. Again, your pension provider will be able to confirm how much you have and what the current limits are.

Getting Ready For RetirementThinking about how your life will change when you retire is an important first step in deciding what to do with your pension. Here are a few things you might wish to consider. This is by no means an exhaustive list, but hopefully it will give you a few ideas to help you in your planning.

INCOME

Will you be retiring completely or do you intend to carry on working, perhaps on a part time basis? What do you expect to receive by way of State benefits? What other investments do you have? Will you be downsizing your property? All these things can affect when you decide to take your pension. You may need all your pension up front, or you may want to leave some of it invested until a later date.

TREATING YOURSELF

Have you made any special plans, such as booking the holiday of a lifetime or buying a new car? The lump sum from your pension may help you realise your dreams, but you must remember to take it into account when drawing up your budget.

HEALTH CHECK

If you suffer any medical conditions, you might be eligible for an improved pension income above the normal rate. Even if you think of yourself as fit and healthy it is worth booking an appointment with your GP for a check-up, especially if you have not been for a while. Something as common as high blood pressure, which you might not know you have, can potentially get you more money from your pension plan.

LOOKING TO THE FUTURE

Do you think you will need more money now or in the future? You might want to go on those dream holidays in the early years of your retirement while you are still fit and active. Or you might be worried about the cost of care should your health decline in later years. Your hopes, fears and expectations can all influence your pension selection.

Introduction

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This booklet explains the different options available to you when you come to take your pension. It outlines the choices you have and the things you will need to think about. Deciding what to do with your pension benefits may be one of the most important financial decisions you ever have to make.

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Key Facts About Your PensionYou can start taking your pension at any time from age 55, even if you are still working. There is no upper age limit by which you must have started drawing an income.

Some of your pension plan can be paid out as a tax-free lump sum. This is normally 25% of the overall fund. Pension income from the remainder is taxed as earnings.

You do not have to take a pension from the company you are currently invested with. It pays to shop around. You may have been loyal to a company for many years, but that does not mean they will provide you the best income when you retire.

The different pension options available to you may seem confusing at first. The names alone sound like jargon:

• Conventionallifetimeannuity

• Assetbackedannuity

• Drawdown

• ‘Thirdway’

• Phasedretirement

Don’t worry though. The next section of this guide will explain what all of this means in plain English, hopefully giving you the confidence to make informed decisions about your retirement planning.

Our Retirement ServiceThe final section of this guide outlines the services we offer. Whether you know exactly what you want and opt for a non-advised annuity or whether you require full financial advice about all the different options, we offer a solution suited to your needs.

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Conventional Lifetime AnnuitiesMost people use their pension fund to purchase a lifetime annuity. As its name suggests, a lifetime annuity guarantees an income for the rest of your life. With a conventional lifetime annuity, this income is not affected by the ups and downs of the stock market, and can be relied upon never to reduce.

How Annuities WorkAnnuities are typically bought from insurance companies, although if you have an occupational plan it may be possible to buy the annuity directly from the scheme. In exchange for the pot of money built up in the fund, the annuity provider pays out an income for the rest of your life. You can also choose to have it continue to your partner or spouse if they outlive you.

The amount you receive is dependent upon several factors including your age and health. Some of the people who buy an annuity will die in the early years of their retirement, while others may live for another thirty years or more. This is taken into account by the providers, and the funds of those who die early help subsidise those who live long into old age.

Interest rates at the time of purchase are another important factor, as they can have a significant effect on the investments used by the providers to maintain your income. Generally, when interest rates go down, annuity rates are also expected to fall.

Enhanced AnnuitiesSome companies offer better annuity rates to people whose life expectancy is reduced as a result of lifestyle or poor health.

It is not just serious conditions such as diabetes, cancer and heart problems which qualify for improved rates. Less serious issues such as high blood pressure or being overweight can make a difference. Improved rates are also offered to many smokers. If you have any underlying medical issues at all, it is always worth letting us know as you might be eligible for a better annuity.

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Payment OptionsIf you buy an annuity, you will need to decide how you want it paid. There are several choices to make.

SINGLE LIFE OR JOINT LIFE?

A single life annuity is for your lifetime only. If you want the pension to continue to a spouse or partner when you die, you can have a joint life policy instead. This comes at a cost, and the amount payable will be less than a single life annuity.

LEVEL OR ESCALATING?

A level annuity does not provide annual increases. The pension will remain the same throughout your retirement. An escalating annuity goes up every year, either by a fixed amount such as 3%, or in line with inflation.

A level annuity will give you the highest starting income, but its real spending power will be reduced over time by inflation. An escalating annuity will give you a lower pension at outset, but can help protect you against inflation over the long term.

GUARANTEES AND VALUE PROTECTION

A guarantee period ensures your annuity will continue to be paid to your nominated beneficiary in the event of you dying in the early years of the policy. The guarantee is usually for 5 or 10 years.

If you die within this time, the annuity will continue to be paid as if you were still alive until the end of the guaranteed term. For example, if you pick a 10 year guarantee and die exactly 2 years after the pension started, your nominated beneficiary will continue to receive payments for the next 8 years.

A guarantee will slightly reduce the amount of income you receive, but the cost is minor compared to a dependant’s benefit or escalation.

Value Protection was introduced as an alternative to a guarantee period. It offers a lump sum payment on death prior to age 77, equal to the remaining fund less the gross payments which have already been paid out to you. The lump sum is taxed at a significant rate. Very few annuity providers offer this option and it is more costly than a guarantee period.

PAYMENT FREQUENCY

An annuity must be paid by regular instalments at least annually. Most people opt for monthly instalments. These can either be in advance from the start date, or in arrears. For example, an annuity starting on 1st January and payable monthly in advance will begin on this date. It is paid monthly in arrears, the first payment will not be due until 1st February.

PROS & CONS OF A LIFETIME ANNUITY

+ Provides the certainty of an income for the rest of your life that

is guaranteed never to go down.

+ It is a fuss free product which does not require any reviews in

the future.

- You will lose control of the capital.

- You are locked into a rate at outset and cannot benefit from

any growth in the financial markets.

- It is not generally possible to change the annuity in the

future if your circumstances change. All decisions regarding

dependent’s pensions, escalation, guarantees and payment

frequency must be made at outset and cannot be changed

later on.

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Asset-backed Annuities

What Is An Asset-backed Annuity?With an asset-backed annuity your pension fund is invested in assets such as stocks and shares. Like a conventional annuity it provides an income for life. You can also include a spouse’s benefit and a guarantee period. Unlike a conventional annuity the amount you receive is not guaranteed. The payments are directly linked to the ups and downs of the stock market.

Asset-backed annuities allow you to benefit from future growth in the financial markets, but there is also the risk of your income going down if the markets perform badly. We offer asset-backed annuities as part of our fully advised service. Because of the additional risks, they are not included in the non-advised annuity option.

THERE ARE TWO TYPES OF ASSET-BACKED ANNUITY:

With Profits

The most common type of asset-backed annuity is one which invests in a with-profits fund. The returns generated by the fund are ‘smoothed’ by the insurance company. Some of the profits in the good years are held back to soften the impact of losses when performance is poor. The aim is to provide a steady rate of return, rather than one which rises and fall sharply. That does not mean, however, that the pension is guaranteed to grow or that the pension will never go down.

Unit-Linked

The performance of a unit-linked annuity is dependent upon the performance of the fund it is in. There is no smoothing, so fluctuations in income can be much greater than from a with-profits plan but the rewards are potentially greater. Because of their unpredictability, unit-linked annuities are generally seen as a riskier proposition than with profits.

STARTING INCOME AND BONUSES

With an asset-backed annuity, you can choose how much income you want to take at the start of the policy. The insurance company will quote a minimum and maximum amount based upon factors such as the options you have taken, your age and the underlying rates at the time.

A low starting income means more of your funds can be invested, giving greater potential for future growth and less chance of your income going down.

A higher starting income, means less of your fund will be invested, so the potential for long term growth is reduced but the chances of the income reducing are greater.

Ultimately, your future income will depend upon the returns generated by the investment.

PROS & CONS OF AN ASSET-BACKED ANNUITY

+ Because your funds remain invested, you are not tied into a

fixed annuity rate for life.

+ Your income has the potential for growth above the rate of

inflation.

+ Most products guarantee a minimum level of income below

which the plan will never fall, providing some safeguards for

the future.

+ There is some flexibility regarding the income payable, both

now and in the future.

- Your income level can go down as well as up.

- It is not possible to predict how much income you will have in

the future, making financial planning more difficult.

- It is not practically possible to change annuity provider once

the plan is set up.

- Income and investments may need to be reviewed regularly.

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Drawdown

You can choose how much income you want to take, and vary this amount in the future to reflect changing circumstances. Because you do not give up the funds to the insurer, drawdown also has more flexible death benefits than an annuity. There are risks to drawdown, however, as well as additional costs. Typically, it is only suited to people with larger funds who are willing to take a risk with their retirement funds. Drawdown requires regular reviews and is only offered by Intrinsic as part of our fully advised service.

Drawdown is a complex product which is not suitable for everyone. The following description is only meant as a brief overview. If you think it might be something you would like to pursue further, your Adviser can assist in getting you the advice you need.

How Drawdown WorksIf you convert your pension fund into drawdown, any tax-free cash lump sum must be taken at outset. This is normally up to 25% of the pension fund. The rest of the funds must either remain invested or be taken as taxed income.

Every drawdown provider will have a selection of funds to choose from. As part of our fully advised service, your consultant will help you select funds suited to your personal circumstances and attitude to investment risk.

You can draw an income directly from the invested funds. There is no minimum amount you have to take, so you can leave the rest invested until such a time as you need it. The maximum income available depends on the type of drawdown you qualify for.

For most people, the only option will be capped drawdown. The maximum income you can take is based on what you might receive from a basic annuity. This amount must be reviewed every three years, or annually if you are over 75.

If you already have sufficient income from other pension sources, you may be able to opt for flexible drawdown. This means you can take as much out of the fund as you want at any time. The amount of pension you need to qualify for flexible drawdown is set by the government and is subject to change.

Once you go into drawdown, you are treated as having ‘retired’. This can have important implications, even if you just want to access the cash and leave the rest of the funds invested. While your investments will continue to grow in the tax-efficient way they did before, any death benefits will be taxable.

PROS & CONS OF DRAWDOWN

+ Avoids locking you into an annuity rate now, which means

that you are free to make the choice when/if to purchase an

annuity (e.g. waiting until rates are higher).

+ Flexibility over the income you take.

+ You maintain control of your pension fund and how it is

invested.

+ There is the potential for fund growth, providing a better

income in the future.

+ Greater flexibility over the death benefits.

- The funds may perform badly, leaving you less money to

provide an income at the next review or if you decide to

convert to an annuity.

- Taking income from the fund depletes your pension pot,

meaning it has to work harder to maintain the same level of

income in the future.

- Drawdown plans require regular reviews and ‘hands on’

management.

- The charges on drawdown plans can be quite high. You may

need a fairly large fund to make it worthwhile.

- The death benefits are taxable.

- Annuity rates may be lower in the future, so you might not be

offered a better income at a later date.

Income drawdown provides an alternative to locking into an annuity rate when you retire. You can still take your tax-free cash lump sum and draw an income, but unlike an annuity, you keep control of the funds and how they are invested.

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Beyond Annuity And Drawdown

Alternative Options‘THIRD WAY’ AND SHORT TERM ANNUITIES

In recent years, several providers have entered the retirement market with new and innovative products that blur the distinction between annuities and drawdown. These hybrid plans are often called ‘third way’ products.

Although technically a form of drawdown, hybrid products provide guarantees on either the investment growth or the amount of pension payable at a later date. Although these guarantees act as a safety net against financial loss, they come at a price. The charges on hybrid plans are higher than normal drawdown, which can restrict the potential for long term growth. In addition, the guaranteed levels may be below what you could have bought from a conventional annuity when taking out the policy.

A short term annuity is actually another variation of drawdown. Instead of taking an income directly from the funds, part of the pension pot is used to buy a temporary annuity which pays out for a fixed term, typically five years. A temporary annuity can provide the equivalent income of a conventional annuity, but because it only lasts for a few years instead of being guaranteed for life, it comes at a much lower cost. The remaining funds can therefore continue to be invested.

When the temporary annuity comes to an end, you can either buy another temporary annuity or convert to a lifetime annuity. The new income will depend on how well the invested funds have performed and what annuity rates are at that time.

Short Term annuities provide greater flexibility than conventional annuities. You are not locked into a rate from outset, allowing you to adjust to changing circumstances. For example, if you develop health issues after starting a Short Term Annuity, you may eventually be able to convert to an enhanced rate annuity which you would not have qualified for at retirement.

As forms of drawdown, both ‘third way’ products and short term annuities should only be considered as part of a fully advised retirement review.

Phased RetirementYou may not need to take all of your retirement income at once, especially if you are planning to continue working in some capacity. Phased retirement allows you to take your pension gradually.

Under phased retirement, you use part of your pension pot to buy an annuity but leave the rest invested. You can take more later on as you need it. Each time you take some of the benefits, 25% will be a tax-free cash lump sum. By taking small regular annuities in this manner, you can use both the cash and the annuity to provide an income.

As well as giving you a flexible income, phased retirement also has tax-efficient death benefits. Before age 75, the funds which have not been converted to an annuity will not be liable for the tax charge which would apply if you were to die in drawdown.

Phased retirement requires careful financial planning and is normally only suitable if you have a large pension pot.

PROS & CONS OF ‘THIRD WAY’, SHORT TERM ANNUITIES

AND PHASED RETIREMENT

+ Avoids locking you into an annuity rate now.

+ Flexibility over the income you take.

+ You maintain control of your pension fund and how it is

invested.

+ There is potential for fund growth, providing a better income in

the future.

+ Greater flexibility over the death benefits.

- The funds may perform badly, leaving you less money to

provide an income if you decide to convert to an annuity.

- Death benefits may be taxable.

- Annuity rates may be lower in the future, so you might not be

offered a better income at a later date.

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The Non-advised Annuity OptionWHAT IS IT?

This is a non-advised service for conventional annuities. We will gather the information from your current pension provider(s) and compare what they are offering against the open market. We will provide you a set of personalised illustrations showing what effect the different options will make to your income. You decide what you want and we will arrange for you to be issued the most competitive quote we can obtain.

As part of the service, we may arrange for a medical-underwriting specialist to telephone you. By conducting a short interview over the phone, we can determine whether you are eligible for improved rates based on your lifestyle or medical history. If you are in poor health or smoke you may qualify for a significantly higher pension.

We treat all personal information with utmost respect and confidentiality.

It is important to understand that you will not be given any financial advice with this product. We aim to provide you the information you need to make an informed choice, but the final decision rests with you. We will not conduct an analysis of your retirement needs, and therefore cannot offer any opinion on whether the options you pick are the most suitable.

WHO IS IT FOR?

The non-advised Annuity Option is only provided for conventional annuities. Other products carry additional risks and complications which require specialist advice.

Non-advised is suitable for anyone who knows what they want and just need someone to get them the best deal. It is particularly suitable for someone with a smaller pension pot. You can still get the most out of your income without the cost of full advice.

HOW MUCH DOES IT COST?

You will be charged a commission, which is taken out of the fund and is accounted for in all quotes we provide. If we can’t get you a better deal, you don’t have to pay anything.

The Fully Advised Retirement OptionWHAT IS IT?

You will receive a full recommendation from a financial adviser, based upon a detailed analysis of your retirement needs. All the products described in this brochure can and will be considered.

WHO IS IT FOR?

Anyone who wants detailed advice on their conventional annuity options.

Anyone who is unsure which product most suits their needs, and who wants help in finding the best product for them.

Anyone who wants to buy an asset-backed annuity, a drawdown plan, a hybrid scheme or phased retirement.

HOW MUCH DOES IT COST?

You will be charged a fee for advice and recommendations. The amount depends upon the complexity of the advice given and the products involved. Your Adviser will be able to provide you with more information.

To summarise, the following table shows what is offered through our Non-Advised and Advised Retirement options.

NON-ADVISEDSERVICE FULLYADVISEDSERVICE

Lifetime annuities only (including enhanced, but NOT asset-backed)

Lifetime annuities

Asset-backed annuities

Income drawdown

Short-term annuities

‘Third way’ products

Phased retirement

Helping You Choose...Whatever the size of your pension fund, and however complex or straightforward your retirement needs, we can help you realise your goals.

We offer the following services:

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What Next?

If you want to use our Non-Advised Service, please complete the enclosed Annuity Enquiry Form. This will provide us with all the information we need to begin the process. It puts you under no obligation to buy an annuity through us if you change your mind.

Depending on your answers to the basic medical and lifestyle questions, you may be contacted by an underwriting-specialist, for a short telephone interview.

Alternatively, if you would like to discuss your retirement options further or are looking for full advice, we are happy to assist you.

Intrinsic Financial Services Limited, registered in England No 5372217. Registered Office: Wakefield House, Aspect Park, Swindon, SN3 ISA.

Intrinsic Financial Services Limited is a holding company, subsidiaries of which are authorised and regulated by the Financial Services Authority.

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