Pensions

There is currently much talk about changes in working patterns in the UK. However, the nature of retirements is also changing.

People are retiring earlier

People are now retiring earlier or only partially retiring and continuing in part-time consultancy work. They are also living longer. The period of retirement is therefore extended and can consist of considerable lifestyle changes.
As a result the financial market for those nearing retirement has expanded rapidly over the last few years. It is now a complex environment containing a variety of product options.

Traditional annuity

Provides a guaranteed fixed income for life. The level of income received depends on yields available in the market on long term fixed interest stocks.

Unit-linked annuity

Operates in exactly the same way as a traditional annuity except that you can select the investment medium used. The level of income is not guaranteed and it is possible that this will fluctuate. The risk of this variability will not be suitable for everyone.

With profits annuity

Offers a “halfway house” between traditional and unit-linked annuities. Typically you select an anticipated bonus rate. If this is high your starting income will be correspondingly high but the outlook for future growth is reduced and your income may reduce. The actual income received depends on the bonus rates declared by the provider each year.

Income drawdown

An income level can be selected between certain minimum and maximum levels. The maximum is broadly equivalent to a single life traditional annuity. In addition your capital stays invested in tax-efficient funds. However an annuity must still be bought by age 75.

Income drawdown offers tremendous opportunities but also carries significant risks – it is not right for everyone. The balance between these opportunities and risks will be different for different people and can change over time.

The main opportunities provided are through the income flexibility along with the continued investment choice it offers. The death benefits can also be significant.

The main risk relates to investment performance. There is the potential for a fall in fund value at times where income needs to be drawn or an annuity is eventually purchased. There is also a risk that annuity rates are poor when the annuity is bought. This could lead to a lower level of income in retirement than if an annuity had originally been purchased. Drawdown plans also tend to be more expensive than annuities and so are more appropriate for larger funds.

Phased retirement

As well as the above options a more sophisticated approach can be taken by “phasing” the use of your retirement fund. In effect this means subdividing your fund into a number of smaller segments and choosing one of the above options for each segment over the period of your retirement. This can generate a number of advantages in the areas of tax planning, death benefits and income flexibility.

How do you know what option is right for you?

Selecting which approach to opt for is not a simple task. The right choice will depend on an individual's circumstances and attitudes.

The key to making the right choice is getting quality independent advice. This advice should continue throughout your retirement.

Make sure you speak to your IFA to help you through the retirement options maze.

“Make sure you speak to your IFA to help you through the retirement options maze.”

You must obtain advice from an investment adviser.