Post Retirement Planning

Your Options At Retirement
It takes many years of planning, saving and sacrifice to build up a significant pension – and after all those years you want to be sure you are making the most of it. Your pension plan provider will be keen to give you a quote for the income that your pension will provide but it would be sensible to take at least a little time considering what to do.

What is an annuity?
An annuity is a guaranteed fixed income which you buy with a lump sum. Its term may end either at a fixed date in the future, when you die or when another named person dies.

The most common reason for buying an annuity is retirement, when the lump sum which you have built up over the years through a company or private scheme is used to provide you with a lifetime income. However, they can be bought by any investor requiring income, with a cash lump sum from any source.

What are the retirement rules?
It used to be compulsory to purchase an annuity at retirement. Now, you can take a ‘pension commencement lump sum’ of up to 25% of your pension fund at retirement and defer your annuity purchase – even as far as age 75 – or you can draw an income direct from your fund instead.

What is the Open Market Option?
This allows you the chance to take your retirement fund to another annuity provider than the one with whom you have actually built up your fund. It is now a legal requirement to ensure you are made aware of what your open market option will be.

What are the alternatives?
You will have to review your annuity options on or before age 75, but up to that point you have a number of alternative choices.

A) Deferred annuity purchase
Deferring the purchase of an annuity to older age might mean the rate of income you can get increases. If you have the flexibility, you may also be able to choose a more favourable time in the interest rate cycle and benefit from any growth in your pension pot for longer. Of course, always be aware that it also means that your retirement fund can be eroded by poor investment performance, lower interest rates or difficult markets or even recalculation of age expectations, the risk of which must be weighted against the potential gains.

If you defer the purchase of an annuity you can arrange an unsecured pension (drawdown) scheme for the interim, which allows you to draw an income direct from your pension fund. The rest stays invested until you want to use it to buy an annuity. Investors can vary the amount of income, subject to HMRC maximum limits.

B) Phased annuity purchase
Phased retirement is really a series of mini retirements. It allows you to buy an annuity or draw down income in stages rather than all at once. You decide the level of income you need each year and take that amount from the plan. Clearly, the level of annuity rate will vary as factors like your age and interest rates will change every year.