Pension freedoms have enabled pensioners to feel more in control of their retirement plan, including when they draw their pension savings and how they spend it. This change to legislation meant thousands of people now opt to draw money at age 55, either for reinvestment, to pay-down mortgages or to enjoy a little when they finish their working life. However, pensions remain volatile and do require careful monitoring.
This article does not constitute advice. Professional advice should be taken prior to acting on any part of it.
The pension world is volatile
Whilst the new pension freedoms are being enjoyed by many, the world of pensions remains confusing and volatile, especially if you have to manage it alone.
The Brexit vote has caused further financial turmoil, and the fluctuations in the stock market threaten pension rates to be cut, so many pensioners are unsure as to the best route for them.
Instead of buying an annuity, as a pensioner you now have the choice to keep your funds invested in an income draw-down scheme, something which attracts many for the potentially higher returns.
Annuities provide the reassurance of a regular income, however, the draw-down policies are more inclined for you to see growth. Although this option is attractive, it typically requires some knowledge of bonds, stocks and fund management, in order to avoid losses.
Choosing a pension product
There are two key pension products which are essential to understand when it comes to pension planning; income drawdown scheme and fixed-term annuity.
Income drawdown scheme
An income drawdown scheme gives you the option to draw money from your pension, whilst the rest remains invested as capital. It is essential that this product gives you enough to live on through your retirement, but doesn’t run out before you die.
Performance of the investment choices is key to whether this is a good option.
With an income drawdown policy, it is possible for you to choose a “ready-made” investment plan that broadly suits your needs. Here, standard investments will be selected for you based on your attitude to risk.
Alternatively, work with a financial adviser to help you navigate your options and aim for higher returns. Generally speaking with investments, low-risk means lower returns.
Fixed rate annuity
A fixed rate annuity is a short term investment option to fund retirement. Two, three or four years are typical terms, so this product has the added benefit over a regular annuity, which is fixed for the rest of your life.
The flexibility of being able to withdraw from the scheme relatively easily at the end of the fixed term, attracts some pensioners. As well, gains can be seen if investments prosper.
However, take care because any annuity that guarantees to fix a payment will make a suitable charge for this, and it may not be worthwhile.
Hybrid option
Some pensioners are opting for a hybrid pension plan. By dividing your pension pot in half, or by a reasonable split, there is the possibility to get the best of both worlds.
An annuity can provide your basic income required for you to live on day-to-day. The rest can be invested in an income drawdown scheme with a view to gaining investment growth.
Costs are often more with a hybrid as setting up both schemes is an investment in itself.
Therefore, it is only recommended if the pension pot can afford to support the costs. There are calculations that need to be made.
Other considerations with your pension planning
There is a lot to consider to ensure your pension gives you the right outcome in your retirement.
- How much income should you take?
- What to do if your portfolio starts to decline?
- Minimise risk by diversifying investments
- Don’t over-pay the taxman by mistake
- Beware a bond crash
- Review your investments regularly
- How to avoid fraud
- If you have a final salary pensions, it’s rarely a good idea to switch them into drawdown
- Get a State Pension forecast as soon as you can
- Consider setting up ‘lasting power of attorney’ in case of cognitive decline and ill heath
- Consider Inheritance Tax
- Consider working with a financial adviser – their fees are usually worth it to ensure your pension is being correctly managed.
Need help with pension planning? Speak to Darren
Dental & Medical Financial Services have been helping doctors and dentists with pension planning for over 25 years. We can work with you to see you get the retirement you deserve.
Tel: 01403 780 770
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