Retirement income: flexibility that might appeal to you
It’s been two years since the Government reformed the UK pensions industry and introduced greater freedoms for those with a personal or ‘defined contribution’ pension. But for many people, more freedom brings greater responsibility, uncertainty, and risk. It’s important to understand these risks as the retirement decisions you make today could have an impact that lasts for decades.
Let’s start with some of the positives. If you live in the UK, there’s a good chance you’ll live to a ripe old age. Over 3.3 million people in the UK will reach 65 in the next five years and with life expectancy improving, many can expect to be in retirement for 30 years or more. This means it’s important to make the best possible choices that will make your retirement years as comfortable as possible.
Before April 2015, when the new pension rules were first introduced, you really only had one option if you wanted to be sure your pension would last throughout retirement. You could take out an annuity that would use your pension pot to pay a level of income, guaranteed for the rest of your life. However, annuities were considered to be inflexible, as they were unable to adapt to changing personal circumstances. And more recently, with interest rates falling, those purchasing them got a lot less for the same fund than those who had retired in the past, calling into question if they were value for money.
But at least with an annuity, you could be certain of your annual income throughout your retirement. You made one decision, at the time of purchase, and you didn’t have to worry about potentially running out of money.
Consumer behaviour towards pensions has changed
Since April 2015, over half a million people have taken advantage of pension freedoms by withdrawing some £9.2 billion of their pensions as retirement income. According to the Financial Conduct Authority’s latest Data Bulletin, from July to September 2016, over double the number of flexi-access drawdown products were entered into compared to annuities purchased. A drawdown plan allows you to keep your money invested but gives you full access to take an income or lump sum from your pension investments when you need to (known as ‘drawdown’). It also means you have the ability to stop, start or vary your level of income or cash withdrawals.
Compared to purchasing an annuity, flexi-access drawdown offers anyone with a pension pot far greater flexibility and control over their income during retirement. But it’s not without its risks. The value of an investment can fall as well as rise and isn’t guaranteed. You could get back less than you originally invested. Any income taken isn’t guaranteed and there’s a real chance that you may need to reduce your drawdown income in the future. In particular, if the performance of your investments is lower than expected, or you live to a greater age than originally anticipated when choosing your initial income level.
Unless your drawdown plan comes with a guarantee, you can’t be certain your money will last to the end of your lifetime. It’s ironic that since annuities have faded into the background, their biggest selling point – guaranteed income throughout retirement – has become more sought after. Fortunately, there are products available that allow retirees to take the certainty of annuities and combine it with the flexibility of flexi-access drawdown.
Guaranteeing a sustainable retirement income
Working out how much income to take from your flexi-access drawdown pot is one of the most difficult decisions you can make. There are many different things to take into account if you want to have a sustainable level of retirement income. Life expectancy, health, attitude to investment risk and how much – if any – you can afford to lose, are all important factors that shouldn’t be ignored
One option is to pay a charge to combine a drawdown with guarantees option - such as Secure Retirement Income. By adding this to your flexi-access drawdown pension, you will have peace of mind that you have secured minimum income level for life. You still have the freedom to manage your investments, but you don’t run the risk of running out of money, even if your pension investments fall in value.
Any guarantees are based on the ability of the issuing insurance company – in this case, Scottish Equitable plc.- to pay them. If for example, that company no longer existed, then the guarantees it provides would be affected.
If you decide to cash in the plan then the guarantee(s) will no longer apply. We don’t offer a guarantee cash in value so you could get back less than the amount you originally invested.
The importance of sound financial advice
Although pension reforms were intended to offer people greater choice and control over their retirement lifestyle, the downside of this is that retirees have been required to do a lot more heavy lifting when it comes to responding to changing personal circumstances in later life and also making sure your pension pot can last throughout your lifetime.
Planning your retirement can be complex and navigating the options available to you daunting. Seeking the professional services of a financial adviser can help guide you through the process. They’ll explain the risks, suggest investment and retirement income options for you to consider and identify a sustainable income level capable of meeting your needs. Throughout retirement.