If you are going to turn your pension fund into a retirement income in the near future, the outcome of the EU referendum has complicated matters.
One of the reasons George Osborne gave for the introduction of his radical pension flexibility reforms in March 2014 was that “the annuities market is currently not working in the best interests of all consumers.” Yet the annuity rates of spring 2014 now look a bargain: by mid-June 2016 typical rates were around 15% lower than when the then Chancellor spoke. Rates have fallen further since, as a result of the Brexit vote driving down bond yields.
If you are at the stage of converting your pension fund into a retirement income, you may feel circumstances are conspiring against you. In fact, the new pension regime has given you more flexibility in how you can draw your benefits. This might not be immediately obvious because some pension providers do not offer full flexibility on their older pension arrangements. If you want to take advantage of more options than are available from your current provider, it is usually a reasonably straightforward matter to transfer to a new arrangement with greater flexibility.
Under the new pension flexibility you can draw down part (or even the whole) of your pension fund as a lump sum, with 25% normally free of tax and the balance subject to income tax. Any undrawn portion remains invested and can be used to pay out more at a later date. Depending on your circumstances, you could use a series of payments to provide a stream of tax-efficient income. At a time when investment markets are volatile, it can make sense to draw from your pension plan only what you need and avoid making a large one-off sale and reinvestment, as would be the case with an outright annuity purchase.
The so-called ‘drawdown’ approach is not right for everyone – you may want some guarantees built into your future income which drawing funds straight from you pension fund cannot supply. The key point is to work out what net income you require from your pension fund and then take advice on the ways in which this can be achieved. Sometimes a combination of methods may be appropriate. For instance, you may use part of your fund to buy an annuity giving you a basic level of guaranteed income; and then you could invest the remainder in funds from which you draw regularly or as needs arise.
This is an area in which individual, expert advice is essential.
Choosing the wrong option can create some large tax bills or leave you locked into a poor value solution for the rest of your life. That can be a long time spent in regret: the average 65 year old has at least a one in four chance of reaching the age of 94.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.