Your pension options at retirement

For most of us, the days of a guaranteed pension for life from our employer are gone.

If you’re reading this, your pension options at retirement are probably more complicated.  These days, you have several choices to make use of your defined contribution pension pot.

Most people have built up a ‘defined contribution’ pension fund over their working lives.

Defined contribution means that the amount you’ve put in is certain, but what you’ll get out is not.

You’ll need to decide how to manage your money in retirement, and divide your pension savings between a lump sum when you finish working, an annuity (or guaranteed income for life), and a flexible retirement fund (known as an Approved Retirement Fund or ARF).  Read on to explore each of these in turn.

Although it’s never too late to take control of your retirement plans, it’s well worth getting to grips with your plans a few years before retiring.

3 key questions as you approach retirement

Preparing to move from building up your pension fund, to drawing down your pension income can mean big changes in three ways.

1. The payroll department is you

Firstly, your approach to managing your money might need to change. The payroll department is no longer in charge of your monthly income. Instead, you’ll need to take decisions around how and when you’ll draw down your pension money.

Will you take the bare minimum in early years, and live off savings and your retirement lump sum? Or will you pay yourself steadily from the start?

2. How will you invest your pension money?

Secondly, there are questions of investment strategy. If you’re drawing an income from your pension pot, you may be less comfortable with investment that have high growth potential, but tend move up and down in line with markets.

For at least a portion of your fund, you’ll probably want to be able to count on it to pay you a regular income. It needs to be stable.  But at the same time, this is money you’ll want to live off for thirty years or more. So an element of growth is likely still required.

3. What’s your income level in retirement?

Lastly, retirement is typically a time for re-setting your income and expenditure levels. In general, both will drop, as costs like mortgages and children reduce, and you transition to living on your pension income.

Tackling these three questions in the years before your stop working helps avoid surprises. You’ll have time to consider and implement changes to your finances, and see the benefits come through.

How income in retirement works

Income in retirement will usually come from a handful of sources: the pension pot you’ve built up over your working life, your other savings and assets, and the State pension.

For most people, the biggest decision is working out what to do with your pension pot at retirement.

In general, you’ll have three main options: should you purchase an annuity, invest in an approved retirement fund (ARF), or take a tax-free lump sum?

The hard bit is deciding how to mix and match these choices to come up with the option that suits you best.  Talk to us about how to plan your decision.

Read on: Annuities