What 'at retirement' options are there?
Retirement can be an exciting time where people enjoy the freedom afforded to them. For some, though, it can be daunting, for various reasons, the main one being whether there will be enough money to last throughout your retirement years. Planning for your retirement and ensuring you are aware of all the retirement income options available to you is so important to help you make the right decisions that will affect you for the rest of your life.
Of prime importance is maximising your pension pot, so one of the first things that you should do is have a pension review to see how well (or badly) your funds are performing. This includes determining if they could do better elsewhere and what you are paying in annual fees. If you have a fund that did not grow at all (this really does happen) and you paid 1% in fees, you have lost money. As an example, if you had a £30,000 fund under these circumstances, after five years you would have £28,530, which is a loss of £1470 - not an ideal investment trajectory.
It could also be that you have multiple funds like the above, with only one that is performing well. If you make the decision to consolidate them into a single fund - whether to try and maximise returns or for another reason - then one benefit of doing so will be a reduction in fees. If, for example, you own five funds, you will pay a fee on each one. Additionally, the fees may be higher for smaller pots, and lower if a large amount is transferred. In this example, you could go from five funds charging 1% in fees to a single fund charging 0.5%. It must be noted though that consolidation is not appropriate for everyone, and shouldn't be the driving factor in moving away from your existing funds. It should only take place following professional advice.
One option as you approach retirement is to take some tax-free cash from the age of 55; under UK law it is currently permitted to take up to 25% of your pension fund tax free. This money can be used however you want, and while most people use it to tackle debts it could also be invested elsewhere, or used to start a business.
The latest Budget introduced radical pension freedoms, which means no one is obligated to buy an annuity. Nonetheless, they will continue to be the right option for some people who want a guaranteed income for life. If you think you would like an annuity then it's important to remember that in most cases you only get to buy one once - your purchase is final, so you can't transfer out later. It's therefore crucial you take the time to buy the one most suitable for you. It could be that a standard annuity is right for you, but if you are a smoker or suffer from conditions including diabetes or cancer, you may qualify for an enhanced annuity, which pay out higher annual incomes than standard annuities. Braver individuals may opt for an investment linked annuity, which are tied to the stock market so annual income can fluctuate based on performance. It's also possible to choose to receive the money monthly or annually, whether it will be a fixed amount each year or rise with inflation, and to receive it for a fixed period - such as five or ten years - even if the policy holder dies in that time. These options do incur a cost, which is paid for by reducing the starting pension income.
A particularly crucial element of At Retirement planning is deciding what death benefits you would prefer. Some plans will end when the policy holder passes away, while others will pay an agreed percentage to the spouse. Some options can leave the remainder of the fund to the estate, so it is passed on to beneficiaries.
The new freedoms provide more flexibility for people, but the extent of the options highlights the need for professional advice so the correct decision is made.
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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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