How can I generate income in retirement?
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I have built up a pension fund over my working life which is now worth about £250,000. I am looking to retire next year and have started to look at what income my pension will give me. I understand from my financial adviser that the best route for income is to draw directly from my invested fund but I am nervous about doing this in case the investments lose value and I won’t have enough. Can I use my fund to get a guaranteed amount every month?
Phil Beck of Smith & Pinching responds:
When you retire, you have two principal ways to generate retirement income: Flexi Access Drawdown (FAD) and annuity. The route suggested by your adviser is FAD. This involves leaving your pension invested and drawing what you need from it as you need it. This is the most popular route these days, as it gives you the opportunity to take regular income or different income levels at different stages of your life. FAD may be capable of delivering higher income than an annuity, but this is not guaranteed, and high withdrawals may in fact be disadvantageous in terms of tax and fund erosion.
Under FAD, your pension portfolio remains subject to market movements and its value can go down as well as up. This has implications for income. You can opt to take a more cautious approach to the investments, thus reducing your exposure to risk, but this may not be a suitable long-term strategy. It is therefore vital to keep the pension investments under review throughout your retirement.
Annuities are what people used to expect from a pension: they provide a guaranteed income for life. An annuity is a plan that you purchase from a pension provider for a capital amount. Buying an annuity is generally an irrevocable decision (although some provision for early death can be built-in) and you set income levels at the outset. You can build in inflation-proofing but you can’t opt, for example, to take higher income levels while you are fit and healthy (so able to enjoy more holidays, etc.) and a lower income later when your spending may be reduced.
Annuities are suitable for some people and it may be that one might be suitable for you – if you are uncomfortable with investment risk. It is possible to use both an annuity and FAD.
The period in the run-up to retirement is a critical one and I strongly recommend that you take independent financial advice at this point to ensure that you make the right choices at this important time.
Any opinions expressed in this article do not constitute advice. The value of an investment and the income from it could go down as well as up. The return at the end of the investment period is not guaranteed and you may get back less than you originally invested.
For more information, please visit www.smith-pinching.co.uk