The decision on how to take retirement income is a big one. Depending on your choice, you may find yourself tied into that income for the rest of your life, even if circumstances change. And since retirement could comprise a third of your life it's important to get it right!
Many people end up with a number of pension plans by the time they reach retirement. In that case, each one could be a different type of plan, and the decision on how to take an income could be applied to each plan separately. However, if the individual plans are quite small - perhaps able to provide you with just a few thousand pounds of income per year - then it may be possible to merge them and take the income decision just once.
Defined Benefit Pension Schemes
First of all, if you have a "Defined Benefit" pension the amount of income you will get has already been set. These schemes generally relate to a particular employment which you were in. Although it may be possible to transfer such a pension scheme to another provider or a different type of plan, it doesn't often make sense to do that since you may lose some benefits.
For these schemes, your income will usually be determined by your salary when you were employed. In most cases, the salary will increase each year in a pre-determined way.
There is little in the way of decision to be made about these schemes - perhaps the only aspect is to decide how much up-front cash you want ("Tax Free Cash", or "Pension Commencement Lump Sum"). It's a balancing act - the more you take, the less annual income you will have subsequently.
The remaining options all apply to "Defined Contribution" pension plans (or "Money Purchase"). These are typically pension plans provided by an insurance company, or may be a "self-invested pension plan". Such plans could be taken out by an individual, in which case they are personal pension plans, or set up by an employer, in which case they are group pension plans.
Lifetime Annuity
A traditional Lifetime Annuity is the most common choice for Money Purchase pension plans... although that doesn't always make it the best choice! It has the advantage of certainty - an income for the rest of your life. But the flip side of that coin is inflexibility - if circumstances change, for example, an annuity won't.
Various annuity options are generally available, including an income which rises with inflation, and an income which continues to provide an income for a spouse after your death.
Unsecured Pensions
Other options are "Unsecured" pensions (or "Drawdown") where all or part of your pension plan remains invested, enabling you to make adjustments according to investment performance and your income needs. After the age of 75 (under review at the time of writing and expected to increase), this option is not available. Changing to an annuity may be appropriate.
Third Way Product
There is also middle ground between annuities and drawdown plans. "Third way" products provide various sorts of guarantee, but with some level of investment access to your funds.
Equity Release Plans
Equity Release plans are also a way of enhancing income in retirement, either on a "drawdown" (when needed) basis, or more regularly. This involves raising capital against the value of your house, and so is only available if you own it yourself. We expect Equity Release to form an increasingly significant part of retirement planning in future as more and more people realise that they don't have enough set aside to provide a good income.
Investment Income
Finally, taking an income from investments is a common way to receive an income in retirement. Ideally, the capital should not be used up, so it remains fully available to provide an income. But this is not always possible or even desirable if Inheritance Tax is an issue.
Action Point
If you are within sight of retirement it is worth getting together your various pension plans and estimating your likely income. Depending on that, you are then in a better position to decide on the best way of taking that income.
Peter Lawrence is an Independent Financial Adviser with Prime Time Financial based in Fleet, Hampshire. He specialises in advising over-50s on all aspects of finances including retirement planning, investments, equity release, and estate planning (Inheritance Tax). To keep your finances in good shape - sign up for our email newsletter at http://www.primetimefinancial.co.uk.
Prime Time Financial is a trading style of Keystone Financial Ltd which is authorised and regulated by the Financial Services Authority.
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