What should you consider when securing an income in retirement?
The economic crisis in 2008 has had a dramatic effect on people seeking to secure an income in retirement.
The effects of low interest rates and quantitative easing have led to today’s historic low annuity rates, which is one of the biggest factors used to calculate how much income your pension pot can generate.
Once you buy an annuity, the income you receive cannot be varied or cancelled, and that is why it is so important to take advice and explore all of the options.
So what are the alternatives to buying and locking into an annuity?
Principally, there are two alternatives to purchasing either a conventional or an enhanced annuity; these are Fixed Term Annuities and Drawdown. A brief explanation of each of these solutions is set out below:
Income Drawdown plans allow a personal pension plan holder to defer taking their pension in the form of an annuity and instead to make withdrawals directly from the pension fund. The level of income that can be taken is very flexible, although for most individuals there is a cap set by the Goverment Actuaries Department (GAD). The pension fund remains invested which means that the underlying fund value can fluctuate up and down as can the income if set at the high levels. Income taken is taxed at the individual’s highest income tax rate.
Fixed Term Annuity – this solution sits between a conventional annuity and Income Drawdown plans. Its aim is to provide a guaranteed income for a set period of time, typically from 5 to 10 years with a guaranteed maturity value. When the plan matures, all the retirement options are available again. Many of the Fixed Term Solutions available have conversion clauses so that if circumstances change it can be ended early without penalty.
The landscape of options now available to those looking to buy pension income is vast, choosing the right option or combination of options is vital if you want to maximise your income potential in retirement. Each solution does come with its own advantages, disadvantages and risks. That is why we believe it is crucial that those nearing, or at, retirement should seek advice.
If you or any of your friends, colleagues or family would like a review of the retirement options available, then please do contact one of our consultants.