Flexible retirement income – what are your options?

As the average life expectancy increases, most of us are likely to spend 20% of our adult life in retirement. This is a very long time, especially when you consider the level of income you will need to live on. If you’re looking for a luxurious retirement, you will also need to bear in mind any rises in the cost of living. So, how do you achieve a comfortable retirement that allows you the flexibility of being able to use your pension income whenever you choose? In this article, we look at the flexible retirement income options, as well as any important factors you may need to consider.

What does the term ‘pension freedoms’ mean?

Back in 2015, the Chancellor announced more flexibility around the way in which you can take money from a private pension. Previously, although you could take 25% of your pension as a tax-free lump sum, the remainder was often used by purchasing an annuity. An annuity pays out an income every year until you pass away. The ‘pension freedoms’ now allow you to take your entire pension as a lump sum – 25% is still tax-free, but the remaining amount is taxed at your income tax rate. The changes in pension rules have given people aged 55 and over the ability to utilise their pension savings in a much more flexible way, allowing them the freedom to achieve things they may not have previously thought possible.

Although it can be useful to access larger sums from your pension, there are greater risks. The recent rise in pension scams has resulted in people losing their life savings through fraudulent schemes. What’s more, unless you have a sound financial strategy in place, the obvious risk is not having enough to live on for the entirety of your retirement. However, if you are in a good position to retire earlier on in life, the increased flexibility of being able to use your pension income could help to enrich your existing lifestyle.

What are the different pension options?

There are many different pension schemes available, so you need to check your current one and decide whether this is likely to work for you in the future. Sometimes, it can be better to transfer your pension to another scheme. However, it’s important not to change your pension scheme unless you have received professional financial advice.

Some pension schemes allow ‘flexi-access drawdown’, which enables you to carry on investing your pension funds whilst having access to your retirement benefits. However, you will need to be mindful of the fact that your income will depend on the performance of those funds. You may have a final salary pension scheme through your employer; known as a ‘defined benefit pension’, this type of pension scheme can be very valuable depending on how it has been set up. However, in view of the recent BHS pension scandal, it is also wise to consider whether your employer (or previous employer) has taken steps to ensure the integrity of their pension provision or whether they are likely to have a pension deficit in the future.

How do I know if my pension will be enough to live on?

Although you will receive an annual pension forecast, this is not enough information to understand your financial security in retirement. Assessing the true value of your pension scheme is a very complex process due to the number of comparisons that need to be made – for example, there may be death benefits and penalties to consider. Always use a qualified, trusted professional to carry out any pension reviews.

Ideally, a sensible financial strategy should include a good mix of products, as well as pensions, such as higher interest savings accounts and possibly investments too (depending on your attitude to risk). First, you will need to carry out a thorough financial planning exercise. This would consider both your current and future lifestyle, including checking any existing or potential financial commitments. It will get you to think about whether you intend to travel or buy property once you retire for example. Once you have painted a clear picture of where you would like to be in the future, you can then set realistic goals and move towards a more flexible retirement.

If you would like a full pension review, please get in touch with our financial planning team. We will look at all the options for you and create a robust financial plan to help you achieve your desired retirement.