Max Horne: Make your retirement fund work harder

Expected pension incomes have fallen to their lowest level in six years, according to Prudential.

Its survey reveals average retirement income estimates have dropped by more than 18 per cent since 2008 to £15,300. Incomes have also fallen in four of the past five years.

In 2008, retirees looked forward to a total average annual income, including private, company and state pensions, of about £18,700 – £3,400 a year more than those planning to retire this year.

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Prudential has said the fall in incomes is even higher due to rises in living costs. Since 2008, inflation has caused prices to rise by 14.7 per cent. A retiree in 2012 would need an annual income of £21,400 to have the same buying power as someone retiring in 2008.

So, what can be done about it? The first thing anyone thinking of retiring should do is to contact an independent financial adviser to inform them on what they can obtain from the pension funds they have built up, whether from a company or private pension. An individual retiring will be offered a pension quotation from the pension company running their scheme but in the majority of cases they would be able to obtain a higher pension by searching the open market with what is known as an Open Market Option. An IFA specialising in retirement income can obtain this for you. They will also ascertain if you have any medical conditions, as these can often lead to an increase in the income an individual can obtain from a pension fund. Also, if you live in a part of the country where life expectancy is lower than the national average, you can obtain a higher pension income.

There are also variations on just taking a straightforward retirement annuity from a pension company, which is an irrevocable decision. If you are in good health, you will obtain their normal rate and this is fixed for the rest of your life. If, however, you have a health incident that would normally give you an increase in pension income in later life, you can’t go back and ask them to increase the payments.

If you have a fixed-term annuity, which is a newer type of product in the market place, you are able to do this. Again, a good retirement income specialist will guide you through this option.

There is, of course, the option to defer taking a pension, but drawing down on the pension fund with an equivalent pension. The beauty of this is that it preserves the fund with the chance of future growth depending on performance, and you also have the ability to increase the amount of equivalent pension you take from that fund every five years. This, however, is only really for pension funds in excess of £100,000, and for those who are willing to take a risk on the fund performance.

• Max Horne is an independent adviser at the Max Horne Group