People with defined benefit, or more commonly known as final salary pensions, have income options when they reach 55 years of age.
However, questions need to be asked, such as: “Does the guaranteed pension offered by a defined benefit or final salary scheme outweigh the advantages of a personal pension plan?”
Here are some more: “Can the final salary scheme offer a partial transfer?”
Also: “Is flexibility more important than guarantees?”
And: “Are there any life changing decisions that can be accomplished with a personal pension?”
There are lots more! Careful planning and assessment of the scheme is paramount.
Pensions have changed
Once upon a time, the default route to a guaranteed pension income was to buy an annuity when you formally retired. That all changed with sweeping pension reforms in April 2015.
These days, many people choose to continue working after they reach traditional company retirement milestones – whether that’s at 55, 57 or 65. That’s not necessarily to keep earning as long as possible. It’s sometimes just to keep busy, maintain working relationships and to enjoy the social things that ongoing employment can offer.
Being able to affect your financial future is a real bonus. For those who saved into defined benefit schemes there is the opportunity to exercise control over their funds at 55.
Income drawdown is taking money from your pension fund. For many, taking a tax-free cash lump sum is a starting point. It allows them to do some of the many things put on hold during working life. The remaining funds can then be used to generate an income (further drawdown) to compliment any other monies earned through full or part-time work. Of course, your state pension can also be collected later.
The tax free entitlement can be taken immediately, or in smaller amounts until 25% of the pot’s value has been drawn. An ongoing income can also be enjoyed, but standard tax rules will apply on the remaining 75% of the fund – based on your personal tax allowance.
There is one obvious point to remember. If you take a large sum at 55, there will be less remaining to be invested across subsequent years. It’s a challenge getting it right, a careful balancing act. You need to make sure you don’t run out of funds in later life.
Working out investment fluctuations
Anyone can calculate the approximate value of an investment that earns interest but reduces each year because of drawdown. However, knowing how to ride out fluctuations in the financial markets, finding better investments, and working out the benefits of drawing less for a few years takes experience. That’s where some considered wealth planning advice is essential.
Logic Wealth Planning has done this on behalf of clients for many years. We combine industry software with independent advisers’ first-hand knowledge to map out your future needs. It’s not just about money. It’s about understanding what you want to do, when and how.
There could be a few years where you don’t need to draw an income. If you have a part-time job, or you inherit a sum of money from a relative’s estate. Then your pension funds can be left to accrue interest, grow and offer you greater flexibility in later years.
Benefits of pension flexibility
Having pension flexibility means that you can not only enjoy the fruits of your hard-earned pension on your terms, like taking an extra holiday, you can deal with unexpected events. You might want to assist with university costs. You could help with the expense of childcare, or support a charity close to your heart.
There is still a place for annuities. In fact, since pension rules changed, you can now combine drawdown and annuity options.
For others, achieving a balanced portfolio of investments to generate an income is the preferred route. That might mean a mix of equities, cash, shares, bonds and property. This will need to be balanced against your risk profile. Again, that’s where a few wise words about money can help.
And that’s not a one-off exercise. You should meet with your adviser regularly to make sure your investments are achieving what you need.
To deliver a consistent yield you should always plan for the long term. Stocks can rise and fall; economies can collapse and have knock-on effects around the world. You need to take measured risks that help your funds grow to ensure that you can drawdown a regular income if you need it.
Investments go up, and down!
When investments perform well, and financial markets are rising, the value of your pension pot could increase. Crucially, unlike annuities which have no death benefits, if you die before your 75th birthday, your beneficiaries can inherit the remaining cash in your pension drawdown product without having to pay tax.
Of course, if you do follow the income drawdown path, the new flexible rules mean that you can still decide to use any remaining pension funds to buy an annuity later on. You really are in control.
The Logic Wealth Planning team is here to help if you need further advice about pensions. Start the conversation with a quick call now: 0808 1234 321