Options at retirement

Stephen posted on September 14, 2011 07:26

Annuity rates may have ‘held up’ during August, but few people believe that there is much scope for them to do anything other than fall in future. The problem is that we are living longer than previous generations and that interest rates are unlikely to recover for some time, This is why those retiring today can expect to have an income that is less than half the amount that a similarly sized pension fund might have secured two decades ago.

Hardly progress, you might think, but the main part of the problem is probably due to improvements in healthcare which have led to increased life expectancy – not just for those born today, but for us all.

Choices of annuities
Once the decisions to be made at retirement were simply whether or not to take a lower initial income in return for future growth, and if a joint-life income was required (and if so on what basis). Recent developments have, however, seen the introduction of new forms of annuity that provide an income for a set period and then a return of (some) capital that allows you once again to decide on the basis of future income – wither through a lifetime annuity or another temporary arrangement.

Inflation-proofing an income (although even RPI-linked annuities may have a cap on annual growth) may sound a good idea, but the initial income is much lower and it can take years for the difference to be made up.

The chart shows that with a 3% inflation factor, the income for a £100,000 pension fund would take about 11 years before the indexed income matches the level income that could have been taken. In fact the accumulated shortfall lasts for a further nine years, or so. This means that you really need to live for two decades to make up the shortfall, in monetary terms.

Temporary annuities have different considerations, because the income is only fixed for something like three to five years (although longer terms may be possible). The question then is whether annuity rates are likely to recover sufficiently during the temporary income period to make up for the fact that you have less capital to purchase the ‘next’ annuity, allowing for your increased age.

Alternatives
Other forms of annuity are available including so-called with profits annuities which offer the potential for a higher income in later years, but also carry the risk that this will not be possible, in which case you could become locked-in to an initial level of income that is likely to be lower than had you simply purchased a guaranteed annuity.

The other option available to most people is drawdown, or pension fund withdrawal, of which there are now two forms, basic and flexible – please click here to read our blog on the topic.

To “TFC” or not
One decision faced by most of us at retirement is whether to take any tax free cash and, if so, how much (up to the limit of 25% of the fund). In view of the fact that the money is tax free – and therefore worth much more than a taxed income, the question may seem surprising. However, there may be good reasons for taking a lower level of tax-free cash, should you wish to maximise the amount of guaranteed lifetime income under one arrangement, in order to allow you to adopt flexible drawdown under another.

Reviewing existing arrangements
What falling annuity rates make clear is that it is essential regularly to review your pension planning arrangements in order to ensure that you are saving sufficient to provide a comfortable retirement. You also need to monitor your existing plans so that you can be satisfied that the investment performance and asset allocation strategies are suitable for your intended retirement timetable; not to mention that old plans do not carry higher charges than might apply to modern alternatives.

Professional advice is essential
When it comes to looking after our retirement planning and investments, vigilance and professional advice are essential. If you are wondering what to do, contact Robert Bruce Associates for individual assistance.

NOTHING IN THIS ARTICLE SHOULD BE SEEN AS GIVING INDIVIDUAL FINANCIAL ADVICE.

Related Posts

Pension measures are pieces in a jigsaw

Perhaps the older generation should have worried the moment …. View Blog Entry

Final salary pensions – set to become history?

Final salary pensions – set to become history?   …. View Blog Entry

Pension choices best viewed early

Pension choices best viewed early Anyone within a few …. View Blog Entry