How to enter retirement after the pension freedoms
Retirement can be a difficult time; not everyone wants to stop working, and the financial decisions such as whether or not to purchase an annuity affect the rest of your life. From next April the available options will be greater than ever before, but that has created extra confusion now and may leave some people wondering what their best option is. To help remove some concerns about what to do as you approach retirement, this post explains a typical journey.
As you approach your retirement age you will be sent a wake-up pack from your pension provider, explaining what your options are. It could be that you want to keep working, or reduce your hours gradually to ease into retirement, or you may prefer to stop working completely. Understanding all the available options will help you make the best decision for your circumstances.
Before this year's Budget, it was common practice for retirees to choose an annuity with their existing provider. This isn't advisable though - if you are certain you want an annuity, you should get other quotes first, as your provider isn't obligated to offer you the best one. We are an independent company so we can get quotes from the whole market, which allows our clients to see the best deals quickly and easily. Checking the market means you will know you're getting the best price, and it could be that we advise you that your existing provider can offer you the best income.
We recommend a pension review when the wake-up pack is received. We offer free, no-obligation pension reviews, which are are essentially a health check on your pension. By the time you are facing retirement there's not much you can do to improve the pension, but a professional review will let you see how well it has performed and what kind of lifestyle it can provide with different options, such as an annuity or drawdown.
In an attempt to help people make the right decision, the government has promised free guidance at the point of retirement. This is good, but it's important to understand the distinction between guidance and advice: guidance is generic information, which may include an overview of the options and risks of each one, and should encourage people to have questions they ask advisers; advice is tailored to each individual, considering their personal circumstances including the size of their pension fund, their objectives and attitude to risk. It's fine to skip the guidance and just have professional advice, but the free guidance is unlikely to be sufficiently detailed to make a retirement decision from. It's also essential to do research before choosing an adviser, and the first step should be looking on the FCA register to check they are able to provide regulated advice.
When considering all the options, think carefully about what is important to you. For example, the flexibility of a pension bank account, the security of a guaranteed income from an annuity, or the death benefits of income drawdown, which allows the money to be passed to beneficiaries while remaining in investments chosen for your attitude to risk. For a lot of people, what happens to their money after they die is as important as what they receive when alive.
One of the most daunting aspects of retirement planning is the thought that it will affect you for possibly decades, but there's no reason why you can't create a flexible retirement plan. This is especially true when the pension freedoms come into effect. Currently, if you're 60 or over with a fund not in excess of £30,000, you can withdraw it as one lump sum, with 25% tax free and your marginal tax rate applied to the rest, and use it how you wish. From April 2015, the £30,000 restriction will be removed. If you have a small pot you will not need to put your money into an annuity that pays out tiny monthly sums, and could instead utilise income drawdown. As an example, if you have equity in a house, a full state pension, a modest private pension and are retiring before 2016, you could create a flexible plan. For people that retire before 2016, the state pension increases by 10.4% each year it is deferred. You could therefore live off drawdown until it runs out, securing you throughout early retirement, and then begin drawing your state pension at the increased amount. Being some years older could also make equity release a viable option, and money released from the property can be taken as a lump sum or as drawdown, which would complement the state pension.
Equity release is particularly popular now, with £1 billion released in 2013. Modern introductions have helped this; for example it's now possible to ring-fence a certain value of the property, which allows homeowners to pass it on as inheritance, and many equity release companies protect against negative equity. This puts people in secure positions while still able to let others benefit from the sale of the asset.
A plan like this makes use of pension freedoms, the state pensions and equity release. It would not be suitable for everyone, but is intended to highlight that a retirement plan can be flexible and adjust over the years. A professional financial adviser will be able to explain the range of options and what would be most appropriate for your situation.
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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: https://www.portafina.co.uk/whats-new
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