What pension options are available?
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I’m approaching retirement and due to stop work early next year. I’ve started to look at what income my pension will give me and I’m a bit confused by the information I am getting from my pension company. I have three funds – all of which are private pensions – which are now worth about £400,000 in total. What are my options?
Phil Beck of Smith & Pinching responds:
Approaching retirement is a critical time for your financial planning. Decisions made at this point may affect the rest of your life. I strongly recommend that you get independent financial advice before taking any action.
Accessing your pension savings can happen in a number of ways. Firstly, you are normally allowed to take up to a quarter of your pension savings at the start of your retirement as a tax-free cash sum. You don’t have to if you have no specific need for cash at this point.
An income from your pension fund can be provided in two principal ways: an annuity or flexi-access drawdown.
An annuity is a plan purchased with your pension savings that provides a guaranteed income for life, however long you may live. It’s a one-off decision requiring an initial outlay and is generally irrevocable (although some protection for dying in the early years of the plan can be built in). If you don’t take your tax-free cash entitlement at the outset, you won’t be able to take it later. Annuity rates have struggled for some years now, but they do provide security for the future.
Flexi-access drawdown involves drawing directly from the pension fund, leaving the remainder invested for potential future growth. It gives you flexibility in how much income you take at different stages of your retirement and means that your money can continue to grow. Also, you usually have the option of taking your tax-free cash entitlement in stages. However, it won’t give you any guarantees and poor market performance can adversely affect the value of your fund. What it will give, however, is the chance to leave any unspent pension to your heirs if you die early.
Flexi-access drawdown has become the most popular pension income option, but does require you to manage both the ongoing investment and level of withdrawals to ensure that your money doesn’t run out. You can, in fact, combine annuities and flexi-access drawdown, either concurrently or at different stages of retirement.
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Please get independent advice at this important stage. The right solution for you will depend on a wide range of factors.
Any opinions expressed in this article do not constitute advice. The value of an investment and the income from it could go down as well as up. The return at the end of the investment period is not guaranteed and you may get back less than you originally invested.
For more information, please visit www.smith-pinching.co.uk