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Retirement - Drawdown vs UFPLS vs Annuity - YouTube
Channel: MeaningfulMoney
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since the pension freedoms of 2015
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taking money out of a pension has been
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more flexible than ever but having more
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options can lead to confusion and then
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to inertia we're just unable to make a
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decision because we don't understand all
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of the options available to us
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now if only there was a place where you
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find out about this stuff in easy
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bite-sized chunks
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hi and welcome back to the channel my
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name is pete matthew i'm a chartered
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financial planner based here in the uk
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and i've been putting up videos on
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youtube for more than 10 years now
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giving you everything you need to know
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and everything you need to do to secure
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your financial future so you're
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approaching retirement and you're
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thinking of switching from saving into a
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pension to taking benefits out if you
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have a defined benefit scheme like the
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nhs or the teachers pension schemes your
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options are going to be limited really
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to the level of income that you take and
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how much of it you give up in return for
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a lump sum but if you have a defined
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contribution pension sometimes called a
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money purchase scheme where you're
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building up a fund of money then
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actually you have quite a few options to
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choose from so as we're going through
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this remember there are chapter markers
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under the video so you can skip around
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and of course if it's useful please hit
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the like button and subscribe to the
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channel if you haven't already thank you
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very much in advance so i think we need
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to understand the mechanics of the
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process of taking money out of a pension
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and the three main options that you have
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so that then we can determine which to
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use in what circumstances so let's jump
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onto the computer to look at that first
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so let's talk about the process of
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crystallization and we need to do that
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by visualizing three distinct areas or
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steps of the process so the first is
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pre-retirement this is where your money
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sits as you are building it up while
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you're working
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then we've got draw down which is just
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one of the options when it comes to
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taking money out and then most
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importantly of course we have your bank
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account where the money needs to land so
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that you can spend it now your pension
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fund is built in the pre-retirement
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phase while you're working and while
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you're saving money into your pension so
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let's just use an example of a two
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hundred thousand pound pension fund here
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and really the process of
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crystallization is moving that money
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from left to right eventually to land in
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your bank account where you can spend it
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and there are three options available
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for you for crystallizing your pension
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fund and the first is called an annuity
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which is simply a guaranteed income for
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life
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now with an annuity as with all the
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options for crystallization you have the
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opportunity to take 25 percent of your
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accumulated pension fund as a tax-free
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cash lump sum if you do that that money
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moves straight into your bank account no
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tax implications and you can enjoy
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spending it with an annuity the
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remaining pension fund of 150 000 is
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spent on buying a guaranteed income for
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life you hand your pension fund over to
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an insurance company and they will
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guarantee an income for life depending
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on the options you choose when you buy
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your annuity that guaranteed income
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might continue to your spouse if you die
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first and it might be indexed that is
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rising over time but crucially the
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pension fund has now gone it is no more
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you can't get it back you have spent it
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using it to buy that guaranteed income
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for life
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that's an annuity next up we have
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drawdown more properly called flexi
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access drawdown which is why i've called
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it flexible withdrawals here
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and again we have a two hundred thousand
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pound pension fund we can decide to take
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twenty five percent tax-free cash again
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that money moves straight to our bank
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account leaving a hundred and fifty
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thousand pound pension fund
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behind and that part now moves into a
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drawdown account it's just another kind
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of pension account
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from which we can now begin drawing an
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income you can think of this pot as a
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bucket with a tap on it and we turn the
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tap on and draw money off it as we need
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it we can do that in ad hoc lump sums we
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can do it in regular monthly amounts
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and of course as we draw money out it's
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taxable so we pay tax on it
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the pot will grow if it's invested
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properly
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but if it doesn't grow more quickly than
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we draw out we will see our pension fund
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erode and if we're not careful
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eventually it could run out altogether
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and that's a danger with drawdown if we
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don't manage our withdrawals and our
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investment carefully we couldn't end up
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running out of money altogether so far
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we've looked at this as an all or
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nothing kind of approach but that's
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actually not the case with flexible
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drawdown we could just decide to carve
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off say forty thousand pounds of our
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pension fund and put that into drawdown
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again
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we can choose to take 25 of the pot as
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tax free cash and if we do that that
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money moves into our bank account and
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the rest of the pot that we've chosen to
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put into drawdown moves into the
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drawdown account leaving their 160 000
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remaining pension fund uncrystallized
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from the 30 000 pound pot we can draw a
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taxable income until it's gone and then
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we can repeat the process taking more of
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our pension pot across the lines into
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drawdown and into our bank account and
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then we have off plus easily the best
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acronym my profession has ever come up
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with
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and this stands for uncrystallized fund
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pension lump sum and the clue is in the
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name there uncrystallized
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so here's our pot as we've had before
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and we can decide to take
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some of that pot as an off plus again
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i've chosen 40 000 pounds here to keep
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the math simple
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and we can shift that 40 000 pounds from
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our uncrystallized pot
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straight into our bank account
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and again 10 000 of that will be tax
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free the other 30 000 will be
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taxable and so we need to take in this
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case basic rate income tax off the 30
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000 and we're left with 24 000 plus our
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tax-free cash so that 40 000 has become
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34 000 and it's gone straight into our
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bank account crucially it has avoided
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the drawdown step altogether
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so this is a simple option if we know we
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need a lump sum we can just opt for off
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plus take it directly from our
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pre-retirement pot into our bank account
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and not bother with the hassle of
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setting up a separate drawdown account
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okay hope that was helpful now an
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annuity first that's the simplest option
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here but it's also the most final
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you hand over your pot in return for an
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income for life
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and the question has to be well how long
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is for life none of us knows how long
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we've got left on this planet so if we
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die early
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we may have had a pretty rough deal
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handing a pot of money over
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and then not getting enough money no
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enough income out in return now you can
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mitigate this to some extent by choosing
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a joint life option if we have a partner
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you can also choose a guaranteed option
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which pays out for a minimum period
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usually 10 years even if we die before
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that 10 years is up the main thing about
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annuities though is that guaranteed
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income if you want to ensure you always
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have the income you need then you should
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definitely consider this option you can
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shop around for the best annuity rate so
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that you get the most income for your
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fund
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if you have medical issues that could
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shorten your life expectancy you should
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get a higher income but the big thing to
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be aware of here is that your pension
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fund is gone
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so the decision to annuitize is a once
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for all time decision it's a really big
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deal now if you want the freedom to
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choose how much you draw from your fund
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and when
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then flexi access drawdown is a great
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option you get the option to take
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tax-free cash and what's left can be
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invested to grow for the future while
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also being able to provide a taxable
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flexible income as and when you need it
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now as we saw you can move your entire
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fund into drawdown in one go or you can
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do it in stages leaving some money
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uncrystallized and then going into
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drawdown with a portion of it and that
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latter option gives you multiple
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opportunities to take tax-free cash
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every time you crystallize a bit more of
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your fun this can preserve your pension
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fund for longer and this is really
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beneficial because pension money is
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outside your estate for inheritance tax
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purposes so you can pass this money to
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your partner or your kids really
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flexibly that's a huge benefit for lots
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of people the downside though is that
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you have to continue to manage the
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investments and also manage your rate of
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withdrawal very carefully if you don't
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want to erode your pension completely so
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there's a layer of complexity to
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consider here
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and complexity also means cost although
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there are some excellent platforms these
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days that can cope with flexible
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drawdown plans pretty cheaply so what
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about off plus then well the off plus
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option just avoids the necessity to open
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and manage a drawdown account so you can
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leave the bulk of your fund
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uncrystallized and just take ad hoc lump
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sums as you need them
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each lump sum will be 25 tax-free cash
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and 75 taxable
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basically that's about it if your
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retirement income needs are met by other
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sources such as state pensions
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company schemes rental income maybe and
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you only really need to dip into your
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pension fund occasionally
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then you can save the cost and hassle of
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managing a drawdown account by simply
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choosing off plus each time you need
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some money out of course
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many people blend these options for a
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optimum approach to retirement so they
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might secure some basic level of income
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with an annuity
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and then use flexi access drawdown to
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top that up somebody with a very low
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tolerance for risk might dread the idea
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of leaving money invested in a drawdown
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account and prefer the risk-free nature
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of annuities most people's income
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changes throughout retirement so maybe
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they retire on one company scheme and
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then another one kicks in five years
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later so they get a bit more income and
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then their state pension a couple of
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years after that so they get a bit more
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the flexibility of the pension options
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now means that you can then tailor the
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process of taking money out of your
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pension funds to suit your specific
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circumstances dialing it up and down as
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you need one final thought i always say
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that most people can get through life
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without needing to seek professional
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financial advice but i also believe that
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anybody can benefit from walking through
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these options with a qualified
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professional financial planner
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and that person can build a tailor-made
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solution for you and your unique
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circumstances and if it's done right
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that can free you up to just get on with
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living giving you the peace of mind to
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know that the best choices have been
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made this is a really big subject and i
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feel like we've only really dealt with
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it at a fairly high level here so if
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you've got any questions leave a comment
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i'll do my best to answer them and if
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there's demand i might do a part two to
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this video just to take the discussion
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on a little bit okay if it was useful
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you know what to do hit the like button
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subscribe to the channel if you're not
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already thank you so much for watching
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this video i'll see you in the next one
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you
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