If you’re near or in retirement, you may be thinking about how you’ll put your retirement savings to work. You’ve worked hard to save and build your pension pot and presumably want to put that money to work for you during your retirement. Whilst options vary by pension plan, chances are you have quite a few you can choose from.
As with many investing decisions, figuring out how to manage your pension involves tradeoffs and what will be best for you depends on your personal circumstances. To help you research and think through this important decision, let’s take a look at a few of your likely options and consider a couple of potential pitfalls.
When you retire you can usually opt to take a tax-free partial distribution. Typically you can withdraw up to 25% of the total value of your pension as a tax-free PCLS, although you should check the rules for your particular scheme(s). You can use your 25% tax-free allowance all at once or over multiple withdrawals. A PCLS can let you access a portion of your pension savings as cash without incurring any tax liability—very useful for projected major expenses and in paying for the unexpected ones. For the remainder you may be able to:
You may be able to ask your pension provider to invest your pot in a flexi-access drawdown fund. This can let you choose from a variety of investments and manage those investments for regular retirement income. Any withdraws, after the PCLS maximum, will be taxable.
A flexi-access drawdown fund can increase your investment options and let you adjust your investment strategy as needed. Investment options will vary by provider. If your current pension provider does not offer what you are looking for, you may be able to transfer your pot to another provider. With a flexi-access drawdown fund you will likely need to be involved choosing and managing your investments or work with a financial adviser. An adviser can also help you identify a level of withdrawals from your account that is likely to be sustainable.
Flexi-access drawdown can be attractive because, as the name implies, it’s flexible. You can adjust your withdrawals, change your investments and even continue to make contributions although the money purchase annual allowance (currently £4,000) will apply if taxable income has been taken. Flexi-access drawdown can also be appealing because the longer your investment time horizon—how long you need your money to work for you or your family—the more likely it is that you will need your investments to grow in order to keep pace with inflation and your expenses.
An annuity is an insurance product that provides guaranteed income over your lifetime or a set period of time. Many retirees opt to use some or all of their pension to purchase an annuity. Of course, if you have a defined-benefit pension scheme, you will already receive a guaranteed, secure income for life, with the amount increasing each year. But, if you have a defined-contribution scheme this is not the case.
You can typically purchase an annuity from your current pension provider or from a different insurance company. There are many varieties of annuities, with the most common being lifetime annuities, which guarantee income for every year as long as you live. Other annuities pay out only for a set number of years. These can be useful if you need more money early on in your retirement, and may pay more than you would expect for a lifetime annuity. You can learn more about annuities on the UK Government’s Pension Wise website.[i] Annuity rates are determined by a variety of factors including your age, health and the type of annuity you purchase.
Whilst annuities offer a dependable monthly income, they also have some potential drawbacks. Some annuity benefits may cease if the holder passes away, and they may not extend to spouse or next of kin. Annuities may have no or quite limited growth potential and some do not include adjustments for inflation. They also come with fees and are generally not flexible if your situation changes substantially and you need or want to change your pension investments.
Beware of offers, especially from companies unknown to you, promising early access (before age 55) to your pension pot. Companies may advise you to transfer your retirement savings to them with the promise of regular payments in exchange. Whilst they may claim that such payments are legal and even cite a loophole such that you do not need to pay taxes, beware. Such schemes are typically unauthorised and illegal. Unfortunately if you fall prey to such a scheme you may owe substantial fees and end up losing your pension if you do transfer it. You can find more information about pension fraud on Financial Fraud UK.[ii]
Deciding what to do with your pension pot and when can be complicated. As with most financial decisions, this depends on your individual circumstances: your tax situation, investment time horizon, projected expenses and other sources of income.
The good news is you will typically have choices of what to do with your pension pot when you retire. These choices include the tax relief afforded by taking up to 25% as a PCLS tax-free withdrawal; purchasing an annuity; or managing your pension investments in a flexi-access drawdown account. Also instead of using your whole pension pot in one way, you can usually mix approaches. In other words, you can take your 25% allowance as a PCLS cash distribution and use flexi-access drawdown for the remainder.
You also do not need to go it alone. If you are interested in help planning your retirement, managing your pension and creating a personalised investment plan, Fisher Investments UK may be able to help. We can help you craft an appropriate portfolio and investing strategy based around your cash flow needs and investment goals and objectives. Fisher Investments UK provides financial advice tailored to your specific investor needs and with your individual pension schemes in mind. We can help you retire with confidence and manage your investment portfolio.
To learn more about how Fisher Investments UK can help, contact us today. You can also read the Definitive Guide to Retirement Income for more information about retirement, investing and your pension options.
[i] Source: UK Government Pension Wise website, as of 30/04/2019. https://www.pensionwise.gov.uk/en/guaranteed-income
[ii] Source: Financial Fraud Action UK, as of 03/06/2019. https://www.financialfraudaction.org.uk/consumer/advice/pension-fraud/Investing in financial markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance neither guarantees nor reliably indicates future performance. The value of investments and the income from them will fluctuate with world financial markets and international currency exchange rates.