Retirement, as we’ve seen, is a very personal thing; it’s unique for everyone experiencing it. Optimising your retirement experience then, is also going to be a very personal thing. But there are still some things that we can all consider as we approach the finish line to optimise things.
We need to consider the financial ways you can optimise your retirement choices. There are various options available to you as you begin drawing down cash from your portfolio, and I’ll do my best to cover them in a fairly high-level way. Remember – seek advice for your particular situation if you’re in any doubt – an adviser can really add some value at this critical stage in your financial life.
Understand Your Pension Options
There are a few ways to get money out of a pension. I’m talking about Defined Contribution pensions here, where you have built up a sum of money and now you have to decide what to do with it, rather than Defined Benefits schemes, where you’ve got a promise of a future income.
Consider Annuities
Let’s start with a mechanism which has understandably fallen out of favour in recent years, since the advent of good, cheap drawdown options and especially since the pensions freedoms of April 2015.
An annuity involves handing over some or all of your accumulated pension fund to an annuity provider in a one-off, irreversible transaction. In return, you get a guaranteed income for life, secured by the annuity company.
You can choose for it to be level or indexed (rising over time); you can have it pay out for a minimum guaranteed period of time, even if you die within that time. You can provide for a spouse or partner if you die first by adding them to the plan.
If you’re in ill-health, are a smoker or taking some kind of medication, you may well get more income for your fund because your life-expectancy is curtailed. The annuity company will be paying you for a shorter time, so they’ll pay you more.
The problem with annuities has always been the unknown period of time that they’ll pay for. After all, how long is ‘for life?’ If you live til age 105 you will really have got your money’s worth.
But if you hand over £100,000 in return for an income of (say) £5,000 per year, and die after two years, that would suck very hard indeed. Annuity rates – the amount of income you get per £1,000 of fund – have also vastly reduced in the last 10 to 15 years, which makes them less attractive than they used to be.
So why consider an annuity? Well, they are an excellent way of securing a minimum baseline income. If you look at your minimum monthly outgoings and release that you don’t have enough coming in from other secured pension sources to cover them, you might want to at least make sure that you have them covered before considering drawdown for the rest of your income needs, perhaps.
Leave a Reply