George Osborne’s pension freedoms have unshackled pensioners from the need to buy an annuity, but with great freedom comes great responsibility.
Understanding how pensions work is key to enjoying a financially happy and stress-free retirement. Guy Myles at financial advice firm Flying Colours explores your pension options.
Annuity or drawdown
Before 2014, purchasing an annuity was your only option (unless you wanted 55% taxation on your withdrawal).
On retirement you would typically scour the market and purchase a product guaranteeing a monthly financial sum to be paid into your account for the rest of your life.
The problem came after the financial crisis where the market for annuities dried up, offering pensioners poor choice and poor returns.
George Osborne’s pension changes, announced in the 2014 Budget, opened up the market for pensioners, allowing them to drawdown an amount from their pension pot each year without facing crippling taxes.
While annuities are still available, financial experts consider them to be a poor investment for most people. As a result, ‘income drawdown’ (or just ‘drawdown’) is increasingly becoming a popular choice for at-retirement decision makers.
Drawdown puts you in the driving seat of your pension, allowing you to choose your investments and the right level of market exposure.
The theory is that your pension pot will grow year-on-year, compensating for the amount that you have withdrawn.
For a large number of people, the simplicity and freedom of drawdown is attractive. But it does demand a more active and informed investment strategy that not everyone is comfortable with. You also need to be conscious about how much you withdraw.
A recent report by the Association of British Insurers has shown that while most are sensible, some pensioners are ignoring the advice of financial experts and withdrawing up to 10% of their pot each year.
While your investments are likely to grow, withdrawing large amounts each year could leave you with very little later on in your retirement.
Getting some help
The rate of withdrawal will have an impact on the future of your pension pot. Thankfully, there are helpful retirement planning calculators out there that can help you understand where you stand both now, and in the future.
If you’re a confident financial planner and happy to crunch the numbers yourself, they can be incredibly useful. But not everyone is.
One of the most common complaints among those approaching retirement is that there is a lack of clarity in terms of advice and that the advice available is too costly. But that doesn’t have to be the case.
Where to go
At Flying Colours, we offer independent financial advice delivered by fully authorised and regulated professional advisors at a fraction of the cost of the competition.
We’ll provide a free initial consultation where we can discuss your requirements before you commit to anything.
And for Silvercard+ holders, all new customers will also receive a £100 Amazon voucher redeemed against the cost of our advice.
If you’d like to arrange a free no-obligation consultation with a member of the Flying Colours advice team, just call us on 0333 241 9916 or visit our website. We’d be delighted to explain how we could help you reach your financial goals.
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