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Unsecured Pension Vs. Annuity
If you do not want to get an annuity, the other option you can consider is getting an unsecured pension (USP), which means you can just leave your pension fund invested and withdraw directly from it when needed. This option is available until you reach age 75. The question is: is getting an unsecured pension a better choice?
Unsecured Pension Pros and Cons
To answer this question, you have to consider the pros and cons of getting an unsecured pension. Its largest advantage is flexibility, which means you can customise and decide when to get your income and how much you can withdraw, although there are certain limits to the minimum and maximum amount. This also means you can wait for annuity rates to improve before you finally purchase an annuity.
Other advantages include the fact that you don’t have to fulfil the commitment of buying an annuity just yet and when you do finally get an annuity, you can tailor it to suit your financial needs and circumstances. In the event of your death, the balance of your pension can be returned to your beneficiaries, although it is subject to tax like withdrawals, or it can be used to buy an annuity for your beneficiary.
As for the cons, the biggest one is that an unsecured pension is, as implied, insecure. If investment returns or annuity rates fall, your income will also fall. Depending on the size of your pension fund and how often you withdraw, you could also end up with not enough income to last your entire lifetime, as opposed to an annuity that guarantees lifetime income.
Both offer tax benefits, namely that your income will only be taxed when you withdraw or receive it and not when it is still in the fund or being invested.
At the age of 75, you will have to switch from an unsecured pension, either to an alternatively secured pension or a lifetime annuity.
What is an Alternatively Secured Pension (ASP)?
An alternatively secured pension or ASP works in pretty much the same way as an unsecured pension, except that the minimum and maximum withdrawal limits are different and are reviewed each year, as opposed to every five years under USP. Your maximum income is also lower, although it still retains its flexibility.
