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Understanding your pension options – and why half of over-55s don’t

Category: News

After decades of hard work, and building a career while saving for your future, you’ll want to be sure the at-retirement decisions you make are right for you.

And yet, worryingly, the results of a recent survey published by PensionAge suggest retirees might not be in a position to do so.

In fact, over half (56%) of questioned 55- to 64-year-olds have “little or no awareness” of their retirement options. Over a third of those in the age group hadn’t even started planning for their retirement.

More encouragingly, 40% were keen to spend more time understanding their retirement options.

Thanks, in part, to your ongoing relationship with Fingerprint Financial Planning, you will likely have a long-term retirement plan in place already. You’ll also have a firm grasp of the available options and those that you might take.

If you’re still not sure, though, keep reading for a rundown of the main decisions you’ll face.

5 pension options to consider in the run-up to your retirement

1. An annuity provides a regular lifetime income

An annuity provides a regular income in retirement and for the rest of your life.

You choose the basis of those payments, including any additional benefits like a spouse’s pension or an income that rises each year to combat inflation. You can also (usually) opt to take up to 25% of your pension pot as tax-free cash, known as a “pension commencement lump sum” (PCLS).

Annuities fell out of favour following the introduction of Pension Freedoms legislation and its “flexible” options in 2015. The traditional annuity is currently seeing a resurgence.

MoneyWeek recently reported that annuity rates have increased by 44% in the last two years. They’re now at their highest rate since 2015.

The stable and known income of a regular annuity payment can make budgeting in retirement simple. You can use the money to pay for known expenses like household bills and mortgage payments. But what about one-off luxuries or big-ticket items?

Once your annuity’s cooling-off period has expired you aren’t able to change your mind, meaning they are quite inflexible. You might find the rigidity of an annuity stifles some of your plans.

2. A flexible lump sum can fund one-off expenses

One of the flexible options introduced via Pension Freedoms, an uncrystallised pension fund lump sum (UFPLS) is a lump sum payment – or a series of such payments.

Whether you opt to take your whole fund or part of it, the payment you receive will comprise a 25% tax-free element, with the remaining 75% taxed as income at the highest are you pay.

A one-off payment can be great for paying one-off expenses for luxuries like world travel or house renovations. But you’ll need to budget carefully.

Remember that your retirement fund is designed to last you for the rest of your life so be careful not to run out when you need the money most.

3. Flexible income withdrawals can be made when you need them

Flexi-access drawdown is another flexible option. It allows you to draw down an income from your retirement fund as and when you need it. These payments don’t need to be made regularly or for a regular amount.

And unlike an annuity, where the fund is used to purchase your income and then exhausted, with drawdown, the remainder of your pot stays invested with the chance for further growth.

You can take your full 25% tax-free cash entitlement in one go or receive it as a portion of each drawdown payment you receive.

Budgeting once again falls to you so you need to factor in the effects of inflation and stock market rises and falls. Inflation will affect the buying power of your money while a market downturn could mean you have to sell more units to receive the same level of income. Both factors could reduce your pot quickly if you don’t keep track.

4. You might choose a mixture of different options

There are pros and cons to both the traditional annuity and newer flexible options.

For this reason, you might find that a mixture of both works well for you.

Consider using an annuity to cover known, fixed expenses, while using flexible options to pay for one-off luxuries. We can help you decide if this is the right option for you so get in touch before making any at-retirement decisions.

5. If your plans or priorities change, you don’t have to retire just yet

Finally, remember that your retirement date is personal to you and it isn’t set in stone. If your priorities have changed, your plan can too.

Maybe you enjoy the social side of work too much to leave or your new plans are more expensive and require further pension saving.

We’re on hand to help at every stage of your financial journey so get in touch to see what we can do for you.

Get in touch

If you’re worried about the choices you’ll face at retirement, we can talk through your options and help you feel confident and in control. Get in touch by emailing or calling 03452 100 100.

Please note

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.

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