Unsecured Pension

This is a way of generating an income whilst not committing a pension fund into an annuity straight away. An Unsecured Pension (USP) allows the 'draw down' of income whilst the fund remains invested. This option can only currently be chosen up to age 75, when pension funds must be converted into an annuity or an ASP (Alternatively Secured Pension).

Why consider a USP?

Whether a USP is the right option for your client will depend on the answers to a number of questions including:

The minimum income your client requires and the fund size that will be needed to support this (within the constraints of their attitude to risk).
When looking at guaranteed (lifetime annuity) versus flexible options what choice can your client make given their financial circumstances?
Would phasing annuity purchase help your client?
Would they qualify for an enhanced annuity and, if so, what difference would the higher annuity income make to the advice you give your client?

Some Pros and Cons of USP

Unsecured Pension
Pros	Cons
Flexibility about when and how much income can be taken (subject to limits set by HM Revenue & Customs)	There is an element of risk - annuity rates may fall and the pension fund could decrease, which could mean a significant decrease in future income.
The commitment to buying an annuity can be delayed.	Our research from 2008 suggests only larger fund sizes (£300k+) would survive a prolonged fall in investment performance.
Annuity rates could improve, allowing time for pension funds to potentially grow.	It is generally agreed that total funds should be a minimum of £100k before a USP is considered
Any future annuity purchase can be tailored to reflect the circumstances at that time.	HM Revenue & Customs limits the amount of income drawn from a pension fund.
On death, the remaining fund can be returned subject to a 35% tax, or used to buy an annuity, unsecured pension or alternatively secured pension for a dependant.	Fees will usually be charged for administration and investment management and the costs associated with these arrangements can be high.
	Be aware of the risks - annuity rates may fall and the value of pensions could go down, meaning a decrease in future income.