Options at Retirement

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You may make some of your most important choices at retirement, setting your income for the rest of your life. It follows that this is a time when expert advice could add significant value. We look at all options to generate the income that you need at your chosen retirement date and specialise in more sophisticated planning for those with larger pension funds.

Final salary schemes

At retirement your employer will pay you a certain amount each year for life based on your length of service and salary. You may have some choices with regard to the amount of tax free cash. There will usually be a pension for your spouse or civil partner should you die first. You are generally ‘tied’ to a set retirement date, with a reduction in the pension if you are allowed to take it earlier.

This valuable type of benefit is disappearing due to the burden on the employer. The public sector still has this structure but benefits are being diluted for new entrants and there is a big question mark over the longer term sustainability of such schemes.

Money purchase schemes

For most people, employer pension provision is now in the form of ‘money purchase’ arrangements. These can be company schemes or your own stakeholder or personal pension plan. In effect you and your employer will drop money into a bucket with your name on it. At retirement your life expectancy will be estimated and your fund will buy you a pension, known as an annuity. Typically the funding is at a lower level than within final salary schemes which means the pension may be smaller than you had hoped for. There may be more flexibility in your retirement date.

Personal Arrangements

If you don’t receive any employer contributions into your stakeholder or personal pension you will take on full responsibility for your retirement income. Building up a fund requires commitment and discipline so it follows that this bucket will fill more slowly and is likely to bring back a smaller income than the above.

Annuity not for you?

The advantage of an annuity is that it is fixed and certain once it is in payment. An alternative to an annuity is to spend down the money in the buckets yourself. This is not appropriate for everyone and we need to carefully consider your wider circumstances and all other options. The aim is to nominally make the capital ‘run out’ on your death.

There are other ways to generate income in retirement, such as from an investment portfolio, property rented out or continued part time working. Your health and appetite for personal involvement in the management of your affairs are key to the long term success of these strategies.

Link: www.moneymadeclear.fsa.gov.uk