How do I draw an income from my pension?
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I am planning to retire this summer, when I will be age 66 and eligible to draw my state pension. I have built up a reasonable pension fund which is currently worth about £270,000. Can I be sure that this will be enough to fund my retirement – and what do I do with it to start taking an income?
Richard Barker of Smith & Pinching responds:
The period immediately before you retire is an important one: it’s a time where you will be making decisions about how to draw your retirement income. It’s also a time where independent financial advice from a Chartered Financial Planner can be particularly valuable.
Firstly, you will need to decide if you wish to draw a cash sum out of your pension pot. Typically speaking, you are permitted to draw up to 25pc from your fund free of tax before you start taking benefits – or you can enjoy 25pc of your withdrawals free of tax going forward if you go down the pension drawdown route.
There are two main ways of drawing an income from your pension. Innovation through government legislation and the pensions industry has provided an option known as flexi-access drawdown. This involves entering into a pension contract that allows you to draw directly from the fund as and when you need to do so, with the remaining fund invested on an ongoing basis. However, it is important to plan your withdrawal levels carefully to ensure that you don’t deplete your fund at any point in your lifetime and to keep your investments under review to ensure they can continue to meet your needs.
The alternative is to buy an annuity, which is a guaranteed income for life. This will involve using some or all of your pension savings to purchase the annuity plan. An annuity offers security of income throughout your lifetime, but may not give as high an income as might be achieved through a drawdown arrangement and doesn’t provide flexibility in the income you receive.
It is also possible to combine both a drawdown arrangement and an annuity during your retirement, either at the same time or at different points.
Whether or not your pension fund can sustain your required standard of living will depend on many factors – including, of course, what that standard of living will cost. I can’t tell you what income your fund can generate without a detailed analysis of you, your pension fund and all your financial circumstances. Please get advice at this critical point.
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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