The new pensions freedom (writes Mark Soper) will enable millions of us to tailor the way we generate a retirement income – although the full panoply of choices to achieve that are not quite yet in place!
Your ability to take up to 25% of your funds each year and invest them in vehicles other than traditional annuity or drawdown schemes opens up options such as buy-to-let property, stocks and shares, gold or perhaps your own business.
But of course, with more choice comes more responsibility for making the RIGHT choice.
And as there is no right way that applies to everyone, here’s my “Pre Retirement Check Sheet” to help you make the best decision for YOU.
First… five points to consider about your personal position
1 Can you afford to keep your money tucked away growing in value, or do you need a flow of income right now?
2 Have you any health issues that might inform your decision – if your life expectancy is impaired, for instance, you might not want to lock up your funds in a straightforward annuity, for instance, but an enhanced one might offer good value.
3 And what is your attitude to risk and return: can you afford to put all or part of your funds into higher risk / higher return investments, or do you need or want to take a safer option?
4 What about those you may be leaving behind… will your financial plans need to provide for them in the years to come?
5 Do you have the time and knowledge to manage more complex investments, would you be safer to leave your money in the hands of a trusted professional, or would it simply be easier to place your funds in a well proven vehicle?
Annuity or drawdown…
If it’s a regular income you are after, you have two main choices: annuity or drawdown.
An annuity can deliver a guaranteed income (either for the remainder of your life or for a fixed period). Variations are also available which will:
- provide an income for your spouse or partner should you pre-decease them;
- keep your income in line with inflation;
- operate for a fixed period, and end with a lump sum;
- take account of poor health (enhanced annuity) and provide a better return.
Don’t assume that the pension provider you have saved with over the years will offer you the best deal: all too often they rely on customer loyalty. So shop around – ideally using an independent adviser or a specialist annuity bureau who will look at the whole of the available market on your behalf.
Annuities represent a risk to both parties: if you die earlier than expected, the provider wins; go past that point and you are quids in. A Drawdown Plan is not only more flexible, but allows you to retain control of your pension fund, and so potentially you can pass some of its original value down to your family – normally free of any tax, including IHT if you die before age 75. If you die after the age of 75, those who inherit may pay tax depending on their own individual tax status.
The biggest downside of drawdown, of course, is the potential for running out of funds during your lifetime… especially if the fund in which it is invested does not perform well.
Of course, you don’t have to choose just the one option – you could divide your available funds between an annuity, drawdown and even withdraw up to 25% of your pension pot to go into another vehicle – spreading your risk and potentially enhancing your return.
If you are still uncertain, then deferring your decision until your circumstances are clearer or more appealing products come onto the market may be your best option. If you do need funds in between, your provider may be amenable to allowing you draw down what you need: do bear in mind your tax limits and also be aware of any early withdrawal charges that may apply.
Find out the facts!
Taking independent financial advice will cost money but could save you far more in the long term.
And if you are wondering exactly how each of these options will affect your future income and lifestyle, the simple, no-cost route is to use your RetireEasy LifePlan – just test out the different scenarios to see which will work best for you. The LifePlan will also signal potential shortfalls well ahead of time, as well as tell you precisely how much you can safely spend each year.
Finally, the website www.pensionswise.gov.uk has a range of tips and helpful materials for you to download and point you in the right direction.