your options at retirement

When you want to retire, you have a number of options as to how to convert your pension fund into an income stream to keep you in gin and strink in your retirement.

These are:

  • buy an annuity (at any age between 50 and 75, age 55 from 2010);
  • take an Unsecured Pension ( a form of income drawdown)

If you have not bought an annuity by age 75, there is further option:

  • take an Alternatively Secured Pension

You can also ‘mix and match,’ by taking part of your fund as an annuity/ies and the rest as Unsecured Pension. But how you convert your pension fund into retirement income depends largely on the size of your pension fund and your financial circumstances and needs.

If you have a relatively small pension fund, you may have no choice but to purchase an annuity. The alternative – taking an Unsecured Pension - is a relatively risky option as you could see your income fall if your pension fund investments perform badly.

This is why it is generally wise to have a pension fund of at least £250,000 if taking  an Unsecured Pension or to have other assets such as rental income, investments and savings to live off in case your Unsecured Pension falls in value.   

Taking an Unsecured Pension involves taking up to 25 per cent of the fund in tax free cash when you retire, and leaving the remaining fund invested in various assets to provide an annual income.

However, there is no obligation to take an income with an Unsecured Pension, so you could just take the tax free cash and let your pension fund continue to roll up largely tax free.

The risks with Unsecured Pensions is that your pension fund falls in value and annuity rates have moved against you by the time you decide to buy an annuity.

As a rule of thumb, an Unsecured Pension fund needs to grow by around 7 per cent a year  after charges, in order to match an annuity. This is a high hurdle rate and can mean that your income falls, or in a worst case scenario that you outlive your assets.

To prevent this happening, the income you can take from an Unsecured Pension  is limited to between zero and 120 per cent of what a standard annuity would pay for someone of your age and gender.

You are also required to have your Unsecured Pension arrangements reviewed every three years to ensure that you are not withdrawing too much cash.

Other options at retirement

You don’t have to save via a pension to provide yourself with an income in retirement.

Increasingly, investors are planning their retirement finances in a more holistic way and realising that other forms of income can be just as good as a pension.

For instance, rental income from commercial and/or residential property, purchase life annuities, income from an investment portfolio and equity release are all valid ways of generating an income in retirement.

The trick is to have a mix of investments which are lowly correlated, so that when one is doing badly, some of the others will be doing well.

For instance, property market downturns tend to lag equity market falls, while some asset classes such as commodities and currencies can act as a safe haven in times of stock market turmoil.

The main thing is to diversify and spread your assets as widely as possible to prevent reliance on a single type of investment or asset class.

Many pensioners opt to trade down to a cheaper property during retirement because they want to move anyway, but thereby release much needed equity from their property without the expense of taking out an equity release scheme.

Increasingly, more and more pensioners are choosing to work part time in retirement, either as a hobby or out of financial necessity. It is now possible to draw a pension from your employer’s pension scheme while continuing to work for that employer.

For more information, read our Guide to your options in retirement.