What are your financial options at retirement?
When you get closer to reaching that magical age in your life where you have decided to retire, you start thinking about your options for retirement. There are a myriad of options available to you and understanding or negotiating these choices can be a bit of a minefield. This article looks at those different paths you have if you have been saving in a money purchase pension scheme.
Option 1: Lifetime annuities
This is the most popular option as it is guaranteed to pay you an income for the rest of your life no matter how long you live for. There are many different types of annuity and options to consider and you should seek professional advice to help guide you.
With the Open Market Option you have on your pension scheme(s), you use your pension fund to purchase an annuity from a life company or insurance institution at an agreed rate. Typically, this rate won’t change for the remainder of the term. It is therefore, highly recommended, to compare annuity rates before agreeing to one.
There are different factors that affect the annuity rate you may be offered by the annuity provider, such as your postcode. You should also consider these options when choosing your annuity:
- Single or life annuity
- Fixed rate or escalating
- Are you eligible for an enhanced annuity rate?
- Annuity lump sum death benefit for protection
- And many more…
The longer you leave it to take out your annuity, then the better the rate you may get, as older people are likely to live less years. However, this may not be the best option still and you should seek advice.
Option 2: Short term annuities
Although strictly, just another form of annuity, they differ in that they only pay an income for a fixed period, up to 5 years. You invest only part of your pension fund into a short-term annuity, which means you leave the rest invested in the pension, with the hope to see a high return whilst it is there. At the end of the fixed period, you may decide to invest in another short-term annuity or opt for a lifetime annuity.
Option 3: Income drawdown
Income drawdown allows you to withdraw part of your pension fund and leave the remainder invested. There are 2 options for income drawdown:
- Capped drawdown – which limits the amount you can take
- Flexible drawdown – where there are no limits providing you meet certain income requirements, called the Minimum Income Requirement.
Income drawdown can be combined with a short-term annuity or a phased retirement and may be a good option in a time of low annuity rates. You may then decide to invest the remainder of your pension fund into an annuity at a later date.
When retiring there are many different options for you to consider and you should certainly take your time, shop around and seek advice as much as you can. We recommend that you read some guides and get an indicative annuity quote to give you a starting point to consider.