Changes to pension rules introduced in 2015 mean that it is now much easier for people who reach retirement to leave their pension funds invested in the stock market rather than being forced to buy an annuity.
While annuities offer a guaranteed income for the rest of the holder’s life, rates have been low for several years now. Leaving pension cash invested in shares and other assets means it can continue to grow after you have stopped working.
Money can be withdrawn from the fund on a regular basis – a process known as drawdown – to provide the income needed in your later years.
Leaving money invested rather than using it to buy a guaranteed income via an annuity carries an element of risk. There is always the chance that stock market falls can reduce the amount of capital you have.
But one of the main issues facing drawdown customers is: how do you make sure your money lasts throughout your retirement? The concern is that if you withdraw too much money from your fund too soon, your capital could be depleted long before you die, possibly leaving you with only the state pension to live on.
Striking the right balance
It is impossible to say what the “right” level of withdrawals should be: the lower the level of growth in your fund and the longer you live for, the less cash you can afford to take out.
Unfortunately, you cannot predict how long you will live for nor how share prices will perform in the future. But there are a number of online calculators that will give you an indication of how much income you might be able to take based on the size of your fund as well as certain assumptions about growth rates and longevity.
The government-backed Pension Wise service has a calculator for what it calls adjustable income here. Just type in the size of your pension fund and the age at which you want to take it and it will give you an idea of what level of monthly income you can expect and for how long.
Remember, you can always adjust your withdrawal levels later on if your fund is being depleted too quickly.
Entering drawdown is a major financial decision so it is worth paying for independent financial advice to help you choose the right option.
An increasing number of retirees are opting for a mix-and-match approach to their pensions.
So they might use some of their fund to buy an annuity while leaving the rest invested – in this way, they will retain a certain level of guaranteed income in the form of their annuity payments plus state pension, while still having the opportunity to benefit from stock market growth.
Alternatively, you could invest for the first few years of your retirement with a view to buying an annuity later on – rates are better the older you are.
Again, a financial adviser can explain the pros and cons of all potential strategies.
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