On reaching retirement you will normally be entitled to a tax free lump sum and a pension which is either already fixed in advance (a 'final salary' scheme) or requires to be bought through an insurance company annuity (a 'money purchase' scheme). Once in payment these benefits are generally guaranteed which means they provide a secure income for life. But this security comes at a price. It has been recognised for many years that pensions in payment can often provide poor value for money particularly when interest rates are low at the time the pension is due to commence. Furthermore, traditional pensions are fixed in payment rather than flexible which means you are obliged to plan your lifestyle around your pension rather than the other way about.
How does the Managed Retirement Account Help
The Managed Retirement Account removes the 'strait-jacket' of fixed pensions and releases your retirement capital to continue working for you throughout your retirement. Under this option your pension benefits are transferred into your own private tax exempt fund, known as a 'SIPP'. During your retirement you are permitted to take income 'withdrawals' at levels which can be varied from year to year. This gives you a high degree of control over your income while still retaining the option to lock into a guaranteed pension at any time, for example when the market conditions for buying annuities are favourable.
When you transfer your pension benefits into the Managed Retirement Account you will still have the option to take a tax free lump sum of up to 25% of the fund. Alternatively you can take part of your tax free cash at the start and defer the balance until later. Any undrawn tax free cash will continue growing in your retirement account free of tax. This structure provides even greater flexibility and allows you to phase your benefits over time, drawing any combination of tax free cash and pension to achieve maximum personal tax efficiency.
Preserving your Capital on Death
Getting a fair return for your money under normal pension arrangements depends on you or your spouse living long enough to get back the initial capital value with a reasonable rate of interest. Although a traditional pension can be guaranteed to be paid out for a minimum period even after death, the guarantee will often cover payments only for the first five years from the date of retirement. This can still result in a substantial loss of value if you die prematurely.
The Managed Retirement Account on the other hand enables you to preserve much of the capital value of your pension for your next of kin should you die prematurely. In the event of death before 75 your spouse has the option to take a continuing pension or if you have no surviving spouse the remaining fund goes to your beneficiaries instead.
If you have enough money in your fund to provide a sustainable income without ever buying an annuity you can continue in drawdown after age 75, in which case it may be possible on your eventual death (or on the subsequent death of your spouse) for your retirement capital to be passed on to your next of kin in the form of separate pension 'pots' for each of your nominated beneficiaries.
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