Despite the government encouraging us to save for old age by allowing tax relief on contributions that we make to pensions, it can seem that barriers and blocks have been put in the way of you saving for your retirement in the last decade. It may really seem like hard work.
- Maybe you’re one of many people in the private sector who have seen their final salary schemes disappear in the last decade.
- Perhaps you’re self-employed and have always had to make your own provision in your own plan.
- Or maybe you’ve been paying into a pension pot for years and haven’t’ stopped to think about it.
Either way, if you’re about to enter your 50s, you will need to think about what enjoying life looks like after work. For most of us, living in a consumer society surrounded by materialism, money is the great enabler.
If you read them, you’ll know from the updates that your pension provider sends once or twice a year, that the value of your pension pot depends on where you decided to invest and how that investment has done.
If that wasn’t enough to contend with – especially over the last six years – you will soon be faced with a big decision when you finally clear your desk and start living on what you’ve put by.
Whether you’re leaving after 40 years of solid employment, selling your business, cutting down on contract work or giving up whatever form your employment took, you’ll probably have a vision for your retirement.
But how do you turn that dream of endless summers in Provence into a reality?
The next step, traditionally, has been to buy a pension in a format that suits your lifestyle and finances.
For some of us that means buying it from the same company that invested the contributions for us. If you’re keen to get extra income, you’re allowed to shop around to find the company paying the best rate on the market. Either way, when you retire, your standard of living depends on annuity rates.
But here comes the sting in the tail. Annuity rates are down by nearly 30% since the second quarter of 2009.
While this could improve in the next couple of years, it’s looking tricky for those of us planning to retire by swapping our pension pot for a pension income. Almost all of us retire on less what we were earning while we were working. Can you afford another 30% cut on top of that?
Buying a traditional pension:
- Guaranteed income for life – however long that is.
- Paid at agreed intervals – certainty.
- “Extras” purchased at the outset – for example: increases over time, pension for your spouse. or partner after you die.
- Financial protection if your pension company goes bust
- Fund/capital lost on death.
- Current rates.
- Locked in, no flexibility.
There is an alternative that’s not widely known about, and this could be right for you. It is known as “income drawdown”.
It’s a complex area and it usually needs a specialist to advise you. But this could be the time for you to consider it.
Instead of handing over your pot of money to an insurance company in exchange for a pension, you keep your fund invested. You can take your money out, up to a yearly limit allowed by the Government. The maximum has just been increased to £6,360 for each £100,000 saved. The Government reviews this rate regularly.
There are advantages and disadvantages to income drawdown.
Advantages of income drawdown:
- You keep control of your pot of money.
- The money remains invested and can continue to grow.
- The remaining pot on your death can form part of your estate to pass on to whoever you want to give it to.
- You can still buy an annuity if annuity rates rise in the future, making it a more attractive choice.
Disadvantages of income drawdown:
- You could run out of money.
- Investments can go down as well as up so your pot of money may be worth less in the future.
- There are no guarantees on the income you can draw.
- There are government limits and conditions.
- Your estate could be liable for inheritance tax when you die.
You can find more information here:
For an explanation of defined benefit schemes and defined contribution schemes have a look at these articles from Money Advice Service:
For more information about annuities visit: https://moneyadviceservice.org.uk/en/videos/what-is-an-annuity