Retirement has changed considerably in recent years. The introduction of Pension Freedoms in 2015 means that you are now able to spend as much of your pension as you like, however you want, from age 55. An Annuity is no longer the default option. 25% is still typically tax-free, you simply pay Income Tax on the remainder.
But, with greater freedom of choice and flexibility comes greater complexity. Pension income isn’t black and white any longer. You’re likely to use multiple sources of income, perhaps including;
- Investment portfolios & ISAs
- Flexible working into retirement
- Property via an Equity Release product
- Pensions, either as a lump sum or Flexi-Access Drawdown
- Purchasing an Annuity
- A Final Salary pension
- Your State Pension
The appropriate order and tax-efficiency of taking income from these various sources depends entirely on your personal circumstances. Possibly counterintuitively, taking your pension income last might be the best way forward, as pensions are usually exempt from Inheritance Tax if you’re planning to pass on a legacy.
However, there are two other primary considerations when retirement planning:
- Your longevity. Millions of UK adults aged 40-54 are underestimating how long they are likely to live by around a decade, according to research from Just Group. Underestimating your lifespan could leave you short of retirement income at a time you may need it most, especially if you require long-term care.
- Sustainability of income. This is where the complexity of structuring your income can play a large part. As your pension is likely to remain invested whilst you draw an income, it still requires careful management to continue to deliver growth. Whereas previously buying an Annuity with your entire pension’s value provided a guaranteed income for life, now you are responsible for ensuring your income remains sustainable.
To try and ensure sustainability in the long term, there are a number of tactics that can be employed. Purchasing an Annuity is beginning to increase in popularity again, for that very reason.
Underpinning your income
If you are fortunate to have a Final Salary pension scheme, it will provide a guaranteed, often inflation-linked, income for life. The vast majority of us don’t however, as they have been slowly withdrawn by employers and the public sector for being so expensive to run.
If you’re eligible for the full basic State Pension, it currently pays £129.20 per week. Whilst this will form a foundation for sustainable income, it’s unlikely to be sufficient.
First, we need to determine your basic living costs, which might include;
- Outstanding mortgage repayments
- Household utilities
- Phone & Internet
- Food bills
Creating a sustainable, guaranteed income to support your minimum monthly expenditure can offer real peace of mind and ensure that no matter what happens, the essentials in life are covered.
Using an Annuity
An Annuity can top-up your State Pension for a guaranteed lifetime income. As part of a diversified portfolio of income sources, having a reliable inflation-proof means of paying essential bills provides financial security.
Whilst they may not be an appropriate option for everyone, Annuity sales have increased recently, driven in part by improving rates available since the negative impact of Pension Freedoms. Demand is also being driven by potential market volatility and an ageing population, as we’ve already discussed.
The rest of your pension portfolio and other retirement assets can then be managed to help achieve your goals and enjoy the additional free time retirement provides.
Whole of market, independent advice
As Independent Financial Advisers, we have no obligations to any one provider of products. Instead, we work for you. When we implement our financial plans, we are therefore able to offer bespoke recommendations from the entirety of the Annuity market to help cover your lifetime living costs.
If you’d like to discuss your retirement income requirements and the figure required to provide a secure underpinning, don’t hesitate to get in touch with one of our expert financial planners who can recommend an appropriate strategy for your entire retirement portfolio.