How does the Managed Retirement Account Work?
Personal Pension Plans were introduced in 1988 to give individuals more control over their own pension provision. At retirement the pension income could only be obtained by purchasing an annuity from an insurance company, and the level of the income obtained would depend on how good (or bad) annuity rates were at that time. In recent years annuity rates have fallen significantly with the result that anyone retiring today receives a much lower income that if they had retired a few years earlier. This system was recognised as being too restricted and made retirement planning something of a lottery.
Under the 1995 Finance Act the Government introduced new rules for Personal Pension Plans to allow income to be taken (as well as tax free cash) without the necessity to become locked into an annuity until age 75. These new 'Income Drawdown' plans were widely regarded as the most significant breakthrough in private pension planning in decades. A glance at the benefits explains why:
- Flexible income levels to suit your changing needs through retirement.
- Your retirement capital continues to grow even while you draw benefits.
- Your fund can be preserved in the event of premature death.
- You have the opportunity to buy annuities at the most favourable times.
This flexibility was further enhanced under the 2004 Finance Act, widening the withdrawal limits and permitting drawdown to continue indefinitely instead of being forced into buying an annuity at age 75. 'Income Drawdown' is now recognised as the natural progression for higher value pension benefits and has become the established retirement vehicle for the affluent.
However it is important to bear in mind that taking advantage of this flexibility means that your benefits are no longer guaranteed, but will depend on the rate of investment return generated on your pension fund and future changes in annuity rates. In some circumstances the new option may not be appropriate, for example where a secure or predetermined income is of paramount importance.
Where a guaranteed income is not immediately essential, it is nevertheless vital to ensure that your pension capital is invested in a manner which will give at least comparable value for money to an annuity with an appropriate degree of security especially in later years. This means striking a balance between your short, medium and long term needs and requires a sophisticated investment strategy which can be adapted as conditions change.