Thanks to the pension freedoms that came into effect in April 2015, you have a lot more choice about what you can do with your pension pot.
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You no longer have to buy an annuity and income drawdown is available to everyone. But all this choice means that making the right decision has become a great deal harder.
Income drawdown might be the right approach for some people, whereas others could be better off spending other assets and leaving their pension alone. Buying an annuity with part of your pot is another potential solution to consider.
More choice, but more thought needed
Retirees today have far greater flexibility when it comes to accessing the money in their pension pot. However, with this flexibility comes the possibility of making the wrong decisions. Under income drawdown, there is a risk that drawing too much income each year could see you using up all of your pension fund within your lifetime, leaving you short of the income you need.
Some people may shun annuities because they want to pass on their pension pot on death. But if they live longer than expected, there may be nothing to pass on and they may even run out of money.
Figures show someone with £500,000 in pension savings who buys an annuity at age 66 could currently expect annual retirement income of nearly £31,500 a year*. This is less than the £43,100 net annual income which the Pensions and Lifetime Savings Association says is required to fund a ‘comfortable’ retirement for the average single person**. However, you may also be entitled to the full new state pension, which currently pays £221.20 per week.
So, if you have a £500,000 pension pot, what could you consider doing with it? First of all, you need to think about more than just your pension savings. A financial adviser will look at your broader personal and financial circumstances to ensure your retirement income strategy meets your needs and that all the risks are fully considered.
Best to consider all your finances
It’s wise to consider all your assets and savings, not just your pension, when planning your retirement income. Under current rules, someone who has other investments available to them could find that the tax applying to their pension fund on death could be lower than the inheritance tax (IHT) on other assets in their estate. They may well be better off accessing other funds for income in retirement and preserving their pension pot.
However, it was announced in the 2024 Autumn Budget that the value of unused pension funds and death benefits will likely be included in a person’s estate for IHT purposes from April 2027. This could significantly affect how you wish to structure your retirement income to make sure it’s taken as tax efficiently as possible.
Meanwhile, if your pension is your main income source for the rest of your life, income drawdown on its own might not be the best choice because the risk of exhausting your fund could be too high.
If we assume for the sake of income drawdown that the £500,000 pension fund grows at 5% a year after charges and that the income increases annually with inflation, then that fund could provide annual income of around £31,500 from age 66 until age 86. For those with more modest needs, the fund could provide a £25,000 annual income until age 95.
Trust the experts
The sensible route is to speak to an adviser and take a complete approach to all your assets.
Taking some financial advice can help you make an informed decision about how to access your money in retirement. By taking a holistic look at your finances, an adviser can find the best way of achieving your retirement aspirations. Here’s an idea – a future with financial peace of mind. Make it a reality with our support.
RBC Brewin Dolphin are located at 31-32 City Quay, Dundee, DD1 3JA. Find out what RBC Brewin Dolphin can do for you.
*Annuity assumptions: single life, monthly in advance, no guarantee period, non-smoker, standard (healthy) rates, 2% indexation, payable for life. Quotes obtained from Iress on 25 October 2024.
**http://www.retirementlivingstandards.org.uk/
The value of investments, and any income from them, can fall and you may get back less than you invested. This does not constitute tax or legal advice. Tax treatment depends on the individual circumstances of each client and may be subject to change in the future. Neither simulated nor actual past performance are reliable indicators of future performance. Information is provided only as an example and is not a recommendation to pursue a particular strategy. Information contained in this document is believed to be reliable and accurate, but without further investigation cannot be warranted as to accuracy or completeness. Forecasts are not a reliable indicator of future performance.
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