Nowadays we have much more flexibility in how we access our pension income. Gone are the days of having to buy an annuity and accepting the reduced flexibility that this offers. We now have a much wider choice of how we access our pensions and much more freedom.
This has however made the situation more complex. More needs to be considered as the choices made at outset can have an impact on retirement income for the rest of your life. We have to consider that future retirees are likely to live longer, have access to the state pension at a later age, have less Defined Benefit (Final Salary) schemes and have near total flexibility in how to access pensions. Did you know that on average men underestimate their life expectancy by around two years and women by around four, so our money may need to last a little longer than we think.
Great care needs to be given to this. It can be very tempting when you see a large lump sum waiting to be accessed with your name on it, however, this can have huge tax implications with you potentially paying higher rate tax on any amount above the typical 25% tax free cash.
You do of course still have the option to purchase an annuity and this has the benefit of securing you an income for life. Knowing that you will always have an income is a necessity for most. It is always a good starting point to understand what income you actually need to cover your expenditure in retirement and what extra income you would like for those nicer things in life, like holidays. This will help you understand if you already have the income you need from your state pensions and other fixed income, or if you will need to raise more and if so how much.
It has to be considered that with a more flexible pot where you can choose to take what level of income you like, that you may start to deplete the pot too quickly and find that you don’t have enough to see you through. On the flip side I have met people who are too concerned to spend the money they have just in case it does not last. The trick is to be able to manage the amount that you withdraw. Care needs to be given to the impact of inflation and the level of growth that you could expect from your investment and completing cash flow modelling can be of great benefit here. It can show you how your assets can be used in the future to give you the best possible standard of living.
The benefits of a flexible pot of money can have great advantages. It may be that you need additional income between your retirement from work and the start of your state or other pension income. Being able to bridge this gap by taking a larger income in the early years and reducing this later can mean that you have the benefit of leaving work earlier than you otherwise might and enjoying a longer retirement. This does not take away the option to purchase an annuity at a later date when perhaps long-haul flights no longer appeal.
Starting to plan early is really important and seeking professional advice is a must in this area. Financial Planners can help to guide you on what your retirement income could look like and give you the confidence you need to make an informed decision. Churning money into unproductive arrangements can add years to your potential retirement date. Also, not having a goal could mean that you are working for longer than you need to.
You never know, you may already be able to hang up your boots.
Kristina Bailey Dip FA CeMAP
This information is provided strictly for general consideration only. No action must be taken or refrained from based on its contents alone. Accordingly, no responsibility can be assumed for any loss occasioned about the content hereof and any such action or inaction. Professional advice is necessary for every case. The value of your investment can fall as well as rise and you may not get back the full amount invested