While most people in this country will receive a state pension, the official retirement age being raised to 65 for men and 63 for women has meant that retiring early is now dependent on having your own pension plan.
If you’ve been smart enough to have this in place over the years, chances are you’ve now got a comfortable nest egg and are looking forward to a long, happy retirement. So it’s a great time to start thinking about the type of pension payment options that are right for you.
It doesn’t matter whether you’ve saved the money yourself, had contributions from work, or even a little of both—almost anyone over 55 can now access their fund and take out a 25% lump sum of it tax free. Use it to supplement your salary to work shorter hours or spend it all on that holiday you’ve always wanted, it’s completely up to you.
However, when it comes to using your pension to provide financial security for the rest of your life, there are three ways to choose how you’d like the rest of your money back as income. And all require careful thought in order to deliver the retirement you’ve dreamed about.
This is where you receive your money gradually, with the flexibility of taking out varying amounts as and when you want. Meanwhile any money left in the fund continues to be invested. The benefit of this is that you give the fund a chance to grow some more—even as you’re spending it—plus any remaining money can be left to someone as an inheritance. However, it involves a degree of risk that your continuing investment might not work out as well as you’d like. Plus, as you don’t know how long you’ll need the money for, there’s a chance your funds will run out before you do.
This might sound great in theory, because you get everything back and have the freedom to spend it as you wish. Unfortunately, a big cash payment could mean a big chunk eaten away in tax. And even if you decide to take smaller lump sums over a certain period to better deal with the tax problem, there is still another issue. Because you’re now going to have the tricky problem of balancing enjoyment of your retirement with trying to make your fixed amount of money last for an unknown period of time. Again you have to tread very carefully to make sure you’re not left without an income.
The third option is perhaps the most secure, but comes at a small price. By taking out an annuity through an insurance company, you’re swapping your pension savings for a guaranteed regular income for the rest of your life—no matter how long you live. This takes the weight off your shoulders in terms of managing your funds and means you’re more likely to be able to relax and enjoy that retirement. The income will also rise with inflation. On the down side, the income usually amounts to less than you would have received with the other two options, plus not all annuities allow you to leave someone you care about (rather than the insurance company) the remaining money as an inheritance. So make sure you choose the annuity that suits your future plans.
Of course, this is a big decision and there’s a lot of information to weigh up. So if you’re still struggling to select an option that best suits you, don’t worry—you don’t have to pick just one! It’s easy enough to design a pension payment plan to suit you by using a combination of any of the three options. Which means you can have your cake and eat it too.
If you’re wondering which pension options are right for you and will help secure the retirement you’ve got planned, get in touch today and speak to one of our pension experts.