The value of pensions and investments and the income they produce can fall as well as rise, you may get back less than you invested.
Tax treatment varies according to individual circumstance and is subject to change.
Since 2015 pension freedom has meant that once you turn 55, you can decide how and when you will spend, save or invest your retirement funds.
But what should you do to ensure that you don’t run out of money?
Take the cash
If you wished you could take your entire pension pot as cash when you turn 55. There are very few circumstances where you actually should, because the taxman will help himself to a substantial share of it.
You can take up to 25% tax free at 55 even if you don’t intend to retire then. Many people find it useful to help pay off the mortgage, leaving them with more disposable income for the rest of their working life.
Initial concerns that pensioners would blow their entire pension pot buying Lamborghinis have not materialised – but many providers believe that savers may not be making the best use of the wealth that remains. Getting expert advice is essential to avoid problems with tax and planning the best way to use your cash.
Buy an annuity
Annuities still remain a prudent choice for some people. A guaranteed income for life is appealing. However, annuity rates do not look very attractive, which means that an annuity may not be able to provide the level of income you may wish.
You can shop around for an annuity – you are not tied to your pension provider. Getting help from an independent advisor could help you see if an annuity is right for you, and where you can find the best income for your pension pot.
Use income drawdown
With low rates on annuities, income drawdown has become the most popular way of funding retirement. It involves keeping the bulk of your pension savings invested after you retire, which gives them the chance to grow while you draw down the income you need.
Ideally, you would want to do this by taking just the funds your savings earn, leaving your capital untouched, although this can be hard to achieve in practice.
It sounds simple enough, so simple in fact that many savers take a DIY approach to drawdown. This is probably a serious blunder. Leaving aside those who switch retirement pots into current or savings accounts where they are whittled away by low interest rates, high inflation and potentially income tax, many people are making poor investment decisions even if they buy a proper income drawdown plan.
Failing to shop around and buying a drawdown plan from their old pension provider is a common mistake. You need to explore the full range of options, and to find an investment plan which will give your funds the best chance of continued growth.
The FCA has noted. “Customers taking decisions without advice rely on the information from firms. This can result in a poor financial outcome for customers. They could be exposed to investments that are too risky for them, or which do not create enough investment return. They could run out of money in retirement if they are poorly informed about the risks of drawdown.”
The message is actually very simple. Whatever you want to do with your pension, and whenever you want to do it, you need expert advice. Pensions are complicated, making the right decisions is essential, and getting help sooner rather than later can help deal with shortfalls. At Continuum, we can provide the expertise you need.
The value of your pensions and investments can fall as well as rise and you may get back less than you invested.
fca.org.uk – non advised drawdown pension sales review – March 2018