Suddenly, the retirement years are around the corner. You've thought things through, filled up the pension fund over the last thirty to forty years and your plans are swiftly all but a reality. Soon you'll be living off your pension. But what exactly does this mean?
When retirement time arrives, choosing what to do with your saved money requires careful thought. For many, the decision is easy – replace your work income with a pension income. It pays to choose carefully, ensuring you enjoy every penny you've invested and saved.
Easy Does It!
Whether you've got £1.5 million banked or £45,000, this is likely to be the biggest cash lump sum you've seen. But remember this. People are living longer and longer. Life expectancy is rising year on year. You might need this pot of money to stretch for another 30 years, or more.
The big decisions are not over yet.
Whatever you ultimately decide to do, know what your options are. Contact us for more information.
As part of our discussions, you may be interested to learn about the alternatives to a traditional Pension Annuity.
Although a basic annuity, in one form or other, will be suitable for some people, there are alternative options available for those with larger funds and a willingness to take higher risks. The main two options include Investment-Linked Annuities and an Flexi Access Drawdown.
With normal annuities, your money will be invested in Gilts. These investments pay out a fixed level of interest and, because the government issues them, they are regarded as a very low risk investment.
Investment-linked annuities, also known as 'With-Profits' annuities, could pay you more if your investment fund performs well and exceeds the annual bonus rate on the policy. By investing in higher risk products, such as the stock market funds, your income may not be consistent. Your annuity could pay less if the fund under performs.
If security is important to you and you're depending on your pension as your sole source of income, you may find this just too big a risk to take.
Compared to conventional annuities, in theory you could potentially generate better returns with an unsecured pension. But they're unsecured for a reason – your investment could be susceptible to drops in the market. This option is for sophisticated investors who are comfortable taking risks and who could afford to lose some money.
With an unsecured pension, your income is not set for life. It remains, at least partly, invested and exposed to the stock market. There are three main types of unsecured pension:
There are three key reasons people choose unsecured pensions above conventional annuities:
With all unsecured pension options, you are relying on strong investment growth to maintain the amount of income available in later years. Even good investment growth might not lead to better value with an annuity if interest rates fall.
Maintaining Fund Value
Not only do you need to outperform inflation with each unsecured pension option, you also need to replace enough of the fund value removed to maintain a reasonable fund value. When it reaches the stage of buying a lifetime annuity, the older you are, the more you'll need to compensate for the loss in fund value, which may lead you to invest in higher risk funds. This is not a route for the faint hearted.
Unlike a lifetime annuity where once bought the job is done, unsecured pensions need regular reviews. The ongoing advice and investment performance monitoring is necessary, as you'll need this information to respond to any issues.
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