If you are thinking of retiring in the near future, then you will need to make some important decisions around how to take your income.
This is one of the biggest financial decisions you will ever make, and yet data from Hargreaves Lansdown shows that less than half of people understand their options. Awareness is slightly higher for the over 55s – but not by much – it means there’s a real risk of people sleepwalking into bad decisions.
This can include buying an annuity that is not right or drawing down too much income early in retirement. This can lead to not having enough income, potentially running out of money, or incurring huge tax bills. All can have a huge impact on your standard of living, and all are avoidable.
Those who have access to a financial adviser will have valuable support navigating these processes in the run up to, and through, retirement. There’s also good news on the horizon for those without access to a financial adviser, with targeted support reforms coming in from April. These will enable providers to really step up the support they can offer to their customers by being able to offer options based on what might work for “people like them.”
Read more: You could be missing thousands in pension tax relief – here’s how to claim it
If you want to find out more about your potential retirement options, then see what your provider can offer you in terms of information, such as articles and webinars. There is also government support through the Pension Wise service, which offers free guidance. This can help you understand your options and work out what level of support you are likely to need.
Some key questions to consider can include:
The state pension will offer a level of guaranteed income which rises every year, as will a final salary pension if you have one. The other option is to buy an annuity with some, or all, of your pension. Annuity incomes have been riding high in recent years off the back of soaring gilt yields, so have proved popular. However, once bought, they can’t be unwound so you need to search the market to make sure you’ve got the right one for you.
For some people, the flexibility of income drawdown will be appealing. This enables you to remain invested in the market for longer and draw an income that meets your needs. However, you need to be comfortable with investment volatility and monitor how much you take, otherwise you risk running out of money.
It’s also worth saying you don’t have to settle for an either/or approach with annuities. You can combine both options to give you a level of guaranteed income as well as a degree of flexibility through drawdown. You can then annuitise in stages throughout retirement as your needs change.
