Investment turbulence and plunging annuity rates means it’s never been more important to make the right choices when it comes to getting the best for your pension savings. Carrie Heron, financial planning expert at Brewin Dolphin, offers her tips on some of the key questions.
1. When should you take your pension?
When pension plans are arranged you will nominate a date to take your benefits. This allows the pension provider to prepare retirement illustrations for your benefit. However, you can elect to take your retirement benefits from a personal pension from the age of 55. You can continue to work and draw benefits from a personal pension, but you must remember that any income from the pension is taxable.
2. Who should you take your benefits with?
You are not limited to taking your retirement benefits with the pension provider you have your personal pension contract with. It pays to shop around to see if another company is able to provide you with a higher level of income in retirement.
3. How are your benefits paid?
Your retirement benefits can be paid to you on a basis which suits your own personal requirements. This may include the provision of a widow’s pension or an increasing income. It’s worthwhile remembering that the more benefits attached to your retirement income the lower the initial income tends to be.
4. Options at retirement
When you reach your selected retirement date the pension provider will generally contact you with options. These options tend to be to defer retirement until a later date; purchase an annuity; or arrange income drawdown, where your pension pot remains invested but you can take income from it in tranches, up to annual limits.
5. Does deferring help?
Your retirement benefits can be taken from age 55. However, if you reach your selected retirement age and decide that the income is not required at this time you may be able to defer retirement until a later date. Deferring for 12 months is a good idea, as it gives you the opportunity to revisit the decision within a short timeframe.
6. Buying an annuity
You can use your pension pot to purchase an annuity that will provide an income for the duration of your retirement. The annuity can be bought from your existing pension provider or moved to an alternative company, who are offering a greater level of income. Up to 25 per cent of your pension pot can be taken as a tax-free lump sum, with the residual monies purchasing the income. It must be remembered that once the annuity has been arranged it is not possible to alter the terms of the contract. The difference between the best and worst annuity rates available is considerable – settle for a poor deal and you’ll pay the price for the rest of your life.
Income drawdown allows you to draw tax-free cash and an income from the pension pot, whilst allowing the monies to remain invested. This is obviously a higher risk strategy as the pension fund can fluctuate in value; however, it offers a more flexible approach to retirement planning.
8. What’s best for you?
Given the potential consequences of taking the wrong option it is worth investing in advice from a qualified adviser or financial planner. They will help ensure that the option selected to provide your retirement benefits will be suited to your current circumstances, taking into account your attitude to investment risk and ongoing costs.
9. Cost implications
If you keep your pension pot invested, either by deferment of retirement or utilising the drawdown option, you should factor in the investment charges you incur. Again, professional advice should be sought to ensure that the contract used is competitively charged and suited to your personal aims and objectives.
It is important to have a regular review of your pension plans to ensure that your savings are invested in a way which are suited to your aims, whilst taking into account your risk profile. Should you be thinking of retiring in the short term you do not want your pension pot to be fully invested in equities. A professional adviser they will be able to structure your pension portfolio to ensure that the investment strategy adopted is suited to your retirement plans.