Most people who have built up enough money to retire on have spent many years saving hard. Sure, there might have been some help on the way in the form of employer contributions and tax relief, but if you have enough money to retire it will certainly have taken some sacrifices along with way.
So, how do you turn that pot of money into an income for the rest of your life? We are experienced in advising clients the length and breadth of the UK on their retirement options so thought we’d put together our five best tips for getting the best possible income from your pension pot.
1. Member of a Final Salary scheme? Then you probably don’t need to do anything!
If you are lucky enough to be a member of a Final Salary or Defined Benefit pension then other than deciding whether you want to take you tax free lump sum you probably won’t need to do anything when you reach retirement.
A Final Salary or Defined Benefit pension will give you, and at a lower level, your spouse, a guaranteed income for the rest of your life. If that wasn’t enough the income will rise each year to help keep pace with inflation.
2. Do you need the lump sum?
All pensions will allow you to take a tax free lump sum from your pension.
The formula for working out how much tax free cash you can have from a Final Salary scheme is rather complex, but for nearly all other pensions it’s simple, you can have up to 25% of the fund.
So before you decide how to create an income from your pension you need to decide whether or not to take the tax free lump sum.
Many people take it so they can repay some debt, pay for large items such as home improvements or a new car, a holiday of a lifetime or simply salt it away for a rainy day or to provide a little more income. Whatever your reason though, now is the time to decide if you want the tax free lump sum, because if you don’t take it now you can’t change your mind in the future.
3. Do you want a guaranteed income?
If you are not prepared to take any risks with your pension fund and want a guaranteed income for the rest of your life then the only option available to you is to buy an Annuity.
Annuity rates have fallen considerably during 2012, by as much as 10% according to some estimates, but it is still the only way of turning your pension pot into a guaranteed income which can never change.
4. Don’t dismiss other options
Even if you think you want a guaranteed income for the rest of your life don’t dismiss other options without considering them. An Income Drawdown plan produces an income linked to investment performance and doesn’t have the guarantees of an Annuity, but for some people, particularly those retiring gradually, it can be an excellent option. As can a Fixed Term Annuity, which provides a guaranteed income for a set number of years, allowing you to change your mind and select an alternative retirement income option in the future.
All we are saying here, is don’t be too blinkered, look at all the options you have before making your decision, as many retirement income options can’t be changed in the future.
5. Think about your spouse
It might be your pension fund, but if you are married then think about how your death would affect your spouse’s income.
If your pension stopped on your death would the reduced income into the household cause financial hardship for your spouse? If the answer is ‘yes’ then you need to make provision for him or her.
If your preferred option is an Annuity or Fixed Term Annuity this means adding in guarantee periods or a spouse’s pension; easy to do, although it will reduce your starting level of income. If you opt for Income Drawdown the options for your spouse on your death are automatically included.
Turning your pension pot into an income can often seem like a series of tough choices, and in many ways it is, especially because some of the decisions are final and can never be changed.
Help is at hand though, in the form of Independent Financial Advice, if you are a novice at this, then seek help and guidance, the benefits will far outweigh the costs.
Writing for Investment Sense, Phillip Bray looks at a variety or issues facing would-be retirees, including how to get the best retirement income, how to select an Annuity provider and which of the range of Income Drawdown providers to use when converting your pension pot into an income.