As retirement approaches, many people start thinking about how to turn their pension savings into a reliable monthly income, a personal “payday” that doesn’t require them to keep working.
There are several ways to do this, each with different advantages, risks and levels of flexibility. At Continuum, we regularly help clients explore these options and decide which combination is most suitable for their circumstances.
Buy an annuity
An annuity can provide the closest thing to a traditional salary in retirement. Before pension freedoms were introduced in 2015, annuities were effectively the only option available.
From age 55 (rising to 57 from 2028), you could use some or all of your pension pot to buy an annuity from an insurance company. In return, you receive a guaranteed income for life. Variations are available, such as inflation-linked income or benefits for a surviving spouse.
The key attraction is certainty. You know exactly how much income you will receive and when, making budgeting and long-term planning much easier.
Annuity rates have improved in recent years. For example, a healthy 65-year-old may currently secure an income of around 7.65%, compared with around 4.1% in 2020. This means a £100,000 pension could provide approximately £7,650 a year for life. Rates may be higher for older individuals or those with certain health conditions.
The trade-off is flexibility. Once purchased, an annuity usually cannot be changed, and income may be lower than could potentially be achieved by keeping funds invested.
Invest in income-paying investments
Some retirees choose to invest in income-producing funds or shares that pay regular dividends. These payments are often made quarterly or biannually and can provide a flexible income stream.
Diversification across sectors and regions can help manage risk, although income is not guaranteed and investments will need to be reviewed regularly.
Currently dividend income is tax-free up to £500 per year, after which it is taxed at your marginal rate. Holding investments within an ISA can help shelter income from tax.
Use pension drawdown
Pension drawdown allows you to keep your pension invested while withdrawing income as needed. Regular monthly or quarterly payments can be set up to create a flexible retirement income.
If investment returns are strong, withdrawals may be sustained without significantly reducing capital. However, many people will need to draw on capital over time, so careful planning and ongoing investment management are essential.
Consider rental income
Property has traditionally been used as a retirement income source. Rental income could provide regular cash flow and may increase over time.
However, being a landlord comes with responsibilities and costs, including maintenance, void periods, fees and taxation. Regulation in this area has also become increasingly complex, so it is important to weigh the practical implications carefully. You should also take into consideration the possibility that the property value might fall.
Use savings interest
Savings accounts that pay interest monthly could offer a simple and secure income stream. Unlike annuities, the underlying capital remains accessible and can be passed on to beneficiaries.
The downside is that interest rates can change and are unlikely to keep pace with inflation over the long term, meaning the real value of income may fall.
Getting the right balance
Spending patterns in retirement are rarely consistent. Many people spend more in the early years, slow down later, and may face increased costs in later life.
Developing a strategy that blends different income sources while taking account of tax, inflation and risk, can help ensure your income remains sustainable.
Professional advice can help you build and maintain a retirement income strategy that is appropriate for you and supports the lifestyle you want, both now and in the future.
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This article is intended for general guidance only and is based on the opinion of Continuum it does not constitute financial advice. Individual circumstances vary, and you should consider seeking advice from a regulated financial adviser before making any decisions about your Savings, Investments, or pension planning.
The value of property investments and income from them can go down as well as up and investors may not get back the amount originally invested.
The value of an investment can go down as well as up and you may get back less than you invested. When investing Capital is at risk.
The Financial Conduct Authority does not regulate taxation advice, deposit accounts or some aspects of Buy to Let mortgages.
Accessing pension benefits early is not suitable for everyone. You should seek advice to understand your options at retirement.
Accessing pension benefits early may impact on levels of retirement income and your entitlement to certain means tested benefits.
Your home or property may be repossessed if you do not keep up repayments on your mortgage.
A pension is a long-term investment; the fund value can go down as well as up and this can impact the level of pension benefits available. Pension Income could also be affected by interest rates at the time benefits are taken. Pension savings are at risk of being eroded by inflation.
Investments do not include the same security of capital which is afforded with a savings account.
Investors in ISAs do not pay any personal tax on income or gains. Levels and basis of reliefs from taxation are subject to change and their value depends upon your personal circumstances.
