Securing the right income in retirement will take real thought25 May 2015
Earlier this year the then pensions minister Steve Webb famously said that it would be up to each individual to decide if they wanted to use the new pension freedoms to cash in their pension savings and buy a Lamborghini.
His comments sprang to mind again this week when I saw reports of a £250,000 Lamborghini that had burst into flames in Dubai leaving a burnt out shell sitting by the kerb. The majority of us couldn’t afford such a car with our pension savings and do we really want to spend them like that?
The number of calls we’ve fielded about the new pension freedoms tells me that people want to explore their options and understand exactly what they can and can’t do with their money.
But I don’t think most of them want to indulge their love of fast cars or luxury holidays. Once you get down to brass tacks people realise that their pension savings have got to see them through retirement and they want that retirement to be as well-funded as possible.
As people begin to think about generating the retirement income they’ll need, the broader range of options they now have means a clear understanding of the pros and cons of each is incredibly important.
The new pension freedoms give people four main ways in which they can generate an income in retirement. The first is to buy an annuity that gives a guaranteed income for life, but little flexibility to change their income, or access their savings later. As their savings are used to purchase the annuity, there’s also no ability to pass these on to loved ones after they die.
The second is to enter flexi-access drawdown, leaving pension savings invested to generate an income but with no guaranteed level of return. This option does, however, have the ability to provide good growth potential and complete flexibility on accessing the money in the event of changing circumstances or market conditions.
Then of course, there is the option described by Steve Webb, where a saver can take the lot as cash. This is again completely flexible, although it’s likely to incur hefty tax charges.
The fourth option is guaranteed drawdown, which offers a middle way that combines a degree of income certainty with a level of flexibility and the potential to benefit from investment gains.
We found that 70% of pension savers are looking to generate some level of guaranteed income in retirement to make sure they can cover their basic costs and enjoy peace of mind in later life.
We also know that the older investors are, the less time their money has to recover from significant downturns and so investing without any type of income guarantee could affect their ability to generate the income they’ll need for the length of time they’re going to need it.
It’s difficult to weigh up all of the options now available and determine the right blend for each individual, but that’s exactly what’s required if every pension saver is going to create a retirement income that gives them the freedom to respond to changing circumstances and the certainty to afford a baseline standard of living.
For those of you interested in understanding more about your income options in retirement, Aegon has launched Your Retirement Planner, a service that lets you see what your savings are worth as an income and the pros and cons of different income options – www.aegon.co.uk/retirementplanner