More and more people are choosing to phase into retirement than stop working entirely. As well as the financial benefits it allows people to adjust both socially and mentally into full retirement.
However, this change in attitudes also brings with it challenges, with advisers needing to consider a combination of solutions to help people ensure that their retirement pot lasts the rest of their lives.
Whilst some people will be able to adjust their lifestyle and budget to their reduced salary some will be looking to their advisers to manage their retirement pot to ensure they maintain their current level of income and lifestyle.
Taking money from their pension pot, beside cash lump sums, can be achieved by considering an annuity or a drawdown product.
Guaranteed annuities provide assurance that for however long a client lives they will receive an income. This income is normally fixed at outset but can be inflation proofed. However, clients need to remember that this is factored into the level of income a provider is willing to offer at outset. Recently annuities have made a comeback but with them being perceived as inflexible and clients wanting to leave money to family members, some clients still have concerns.
Drawdown investment products gives clients flexibility to choose how and when they receive an income whilst keeping their pension pot invested. And on death the remainder of the pension pot can be passed on, however, there may be a tax liability.
Have you ever considered using a flexible annuity as part of an overall retirement strategy?
Flexible pension annuities are investment products which are purchased with crystallised pension pots. Being flexible has advantages and an adviser can document a clear plan with their client of when to take the income payments and the amounts to be taken. When phasing into retirement being able to receive a regular income to supplement a reduced salary can help clients adapt. Or it may be that a client can supplement their income from other assets and chooses to stop any annuity payments leaving the pension pot so it can grow until they transition into full retirement.
Having a clearly documented plan based on a client’s goals and objectives will help to manage any stresses and worries as they get older.
A flexible annuity is an investment product where clients can select which assets and funds to invest in. At the start of a client’s retirement journey, they may be happy to take on more risk but as they get older this could change. The investments sitting within the flexible annuity can be tailored to meet a client’s current and future attitude to risk.
Introducing LCA’s Flexible Pension Annuity
You may think that flexible pension annuities are just another form of drawdown as clients have the ability to decide when to take income. However, LCA’s Flexible Pension Annuity (‘FPA’) is a lifetime annuity that allows clients to vary the level of income. And on death any remaining investment can potentially be passed on tax free to the client’s family members.
LCA, an unlisted trading company, is divided into individually recognised cells (this is known as a protected cell structure). When a client buys a FPA the assets and funds they invest in are placed into one of these cells. This means that each client’s individual investments are ring-fenced and safeguarded from all other clients’ investments.
Attached to each cell is at least one preference share in LCA. As a separate cash transaction, a client can buy the preference share that is attached to the cell that holds the investments which are used to support the FPA. Purchasing the preference share means the value of the investments, after the client’s death, which remain within the cell legally belong to the owner of the preference share (‘shareholder’). This is a major advantage of LCA’s flexible annuity compared to a traditional guaranteed annuity where there is no return to the estate on death.
On death the FPA stops, and no further benefits are payable from the annuity. But the shareholder can redeem the preference share and receive the value of the assets that remain in the cell.
Where the client held the preference share on their death, ownership is passed to their personal representatives and the value must be included in their estate for inheritance tax purposes.
As LCA is an unlisted trading company, potentially 100% business relief is available. As part of the probate process the personal representatives can claim the relief and provided the deceased owned the share on death and had owned it for at least two years the value of the share (the remaining value of the assets) can be passed on tax-free to the estate’s beneficiaries.
As the preference share is an asset, potentially the client could gift it during lifetime. Before gifting we would recommend that a client seeks their own legal advice.
To summarise:
- Annuities provide a regular income, which if flexible can help clients phase into retirement.
- Flexible annuities, being an investment product, allow the client’s ‘pot’ to remain invested. As LCA is a Gibraltarian company the ‘pot’ can be invested in a wide range of permitted assets that can be tailored to the client’s objectives and goals. Furthermore, LCA’s FPA can accept in-specie transfers.
- As flexible annuities invest in funds and assets that can fall in value the income is not guaranteed. Therefore, as part of a client’s review the performance of the investment and the amount of income being taken should be managed on a regular basis.
- As LCA is a protected cell company buying a preference share as well as a flexible annuity can be advantageous.
If you would like to know more about LCA or our products, please view our dedicated product webpages or contact us for more information.
This article is based on London & Colonial Assurance PCC Plc’s understanding of applicable UK tax legislation and current HM Revenue & Customs practice, as of November 2024, which could be subject to change in the future.
