If you are retiring soon you’re probably looking forward to
taking advantage of the new pension freedoms, which give you more flexibility
and control over your retirement savings.
However, before you go jumping in with both feet it might be worthwhile giving some thought to the challenges that you are likely to face in arranging a secure and flexible income for retirement.
Now that you’re no longer required to purchase a lifetime income annuity, there are a few questions to consider:
* Should I buy an annuity at all?
* If not, then how should I manage my pension pot
to make sure I have enough income to cover my spending?
*And perhaps most concerning of all; am I likely
to outlive my savings?
A report by Retirement Advantage, published last week highlights the compromise
between having a secure income and having the flexibility of a drawdown
pension. It turns out that what most people value above anything else is
security and certainty of income (43%), and coming a close second was
flexibility (34%).
Unfortunately, it can be tricky to find a middle ground
between the security of a guaranteed income and the flexibility of being able
to access larger sums in case of unexpected circumstances.
Long lives the annuity
While the days of the traditional annuity-for-all might be
over, the certainty of a guaranteed income still makes good sense for those who
value security, especially if the annuity is set to rise with inflation.
Annuities are still one of the only options for insuring you against outliving
your savings.
But annuities aren’t for everyone, particularly if you’re looking for flexibility. Annuities are a one-size-fits-all deal, which won’t adapt to your changing needs. For example:
* If you are unfortunate enough to die 5 years into
retirement an annuity won’t leave anything behind for your loved
ones.
* Or if after signing the contract you learn that you
have an incurable disease that will reduce your life expectancy to a
precious few years. In this case, your annuity won’t give you any flexibility
to take extra income so that you can enjoy your final years.
Drawing on flexibility
An alternative approach might be to self manage your
retirement savings through a drawdown pension.
The safest way to go about this would be to pick a reasonable life expectancy (say 100), invest your pension pot in line with your attitude to risk, and each year withdraw enough money to cover your expenditures ensuring that you don’t leave yourself short for the future.
The increased flexibility of being able to withdraw money as and when you need it is likely to have a wide appeal, particularly as life is uncertain and often results in unexpected costs.
However, what is gained in flexibility is fundamentally lost in security. You can have no certainty that your pension pot won’t run out during your lifetime, particularly as the value of your pot is linked to the uncertainty of your investments.
Additionally, tough spending decisions will need to be made at least annually because you now have the prospect of outliving your pension.
The best of both
So is it possible to have both a secure and flexible
retirement income?
One option might be to use your pension to annuitise your essential expenditure and invest the remaining amount into a drawdown pension.
This would provide you with the security of a guaranteed income each year for the rest of your life to cover your basic needs, whilst delivering the flexibility to drawdown additional income, as you require it.
An important decision
You will have worked hard throughout your life to ensure you
have a secure income in retirement that is flexible enough to meet your
changing needs. This should be a simple and straightforward affair, however as
the landscape changes, challenges are likely to present themselves.
Securing a certain and flexible retirement income is one of the most important decisions you are likely to ever make, at this important juncture in your life serious consideration should be given to how best to manage these potential pitfalls.
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