How to avoid running out of money in retirement

The latest figures from HMRC show that £2.7 billion has been removed from pensions since April this year, when the new pension rules took effect.

In total, 146,000 people removed money from their pensions, making the average withdrawal per person £18,600 in the second quarter and £14,400 in the third quarter.

At first glance this suggests that it is smaller funds people are accessing, and HMRC confirms that the figures include both lump sums and drawdown payments.

Not only does this demonstrate that people have not been reckless with the freedom to access their pension, it also highlights an often overlooked point – a fund of £18,000 is unlikely to provide a sufficient later life income, and many people may benefit more from the money today.

One popular option appears to be using pension cash to start businesses. The pension freedoms have made this a possibility for the first time, and it may be particularly appealing for people whose smaller funds are not substantial enough to provide an adequate income throughout retirement.

In the right situation this can be an empowering and successful decision, but it is not guaranteed to be so. One large pitfall is people overestimating how far money will go – and this needs to be carefully evaluated before choosing a retirement income, whether you plan to start a business or not.

Your income can be protected

Traditionally, this income was an annuity, which offers a guaranteed income for life in exchange for your pension fund. These are still available, but they are inflexible, typically irreversible and the insurance provider keeps the remaining value of your fund if you die before exhausting it (if you have a joint life policy, they will continue to pay an income to your beneficiary).

Another main option is pension drawdown. Your fund remains invested in the hope of growing, and you withdraw an income from it directly. This is a more flexible option and any remaining money can be passed to a beneficiary, but it is possible to deplete the entire fund and be left with little or no money for the rest of your life.

This choice is flexibility or security. But what about people who want both?

What if you know that you often think money will go further than it actually does and worry about running out, but don’t want to purchase an annuity? What if you want:

  • The peace of mind that your income is guaranteed – for life
  • The ability to change, pause or stop taking an income whenever you like
  • The option to take lump sums*
  • Your fund to remain invested so it, and your income, can grow
  • The security that your income will not drop even if there is a market crash
  • To leave an income or lump sum to beneficiaries

All of this is now possible with protected pensions.

Protected pensions and guaranteed drawdown

Although pensions are excellent savings vehicles and offer tax relief and tax-free growth, investments in the stock markets can rise and fall. Crashes, such as in 2008, can be devastating to your retirement income. If you have an annuity then you have no exposure to this volatility, but if you are in pension drawdown or approaching retirement then you are at greater risk.

Protected pensions offer a solution. These are pre-retirement products, so you can ‘lock-in’ your future income before you retire, with the ability to benefit from increases if the market performs well but also being protected from losses. When you eventually retire you can then enter guaranteed drawdown, which gives you a secure income for life with flexibility and death benefits, including the option to provide an income to a beneficiary.

Think about what this would mean for you.

With guaranteed drawdown you will know what your income will always be, offering security that the rent and other bills are covered. It may also be enough to pay for an annual holiday, while lump sums can be taken if you ever decide that you need them, perhaps to help a child or clear debts*.

The pension freedoms are in full swing, and now you can have the best of both worlds: security and flexibility.

Your future, the way you envision it.

If you would like to talk to someone about your options, give us a call on 01634 733 165 or fill in the form to the right. Drawdown is not suitable for everyone and is dependent on your individual circumstances, so it is important to seek regulated financial advice before making a decision.

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Important Information

Taking lump sums will reduce the income you receive and could affect the guarantees on the plan.

The details provided in this article are for general information only and are in no way deemed to be financial advice. All of the material is correct as of the publication date, but could be out-of-date by the time you read the article. For our latest information and news, please see our articles section:

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